Key takeaways
The scenario is a familiar one to e-commerce retailers: a supplier increases prices on an item, so a category manager increases the item’s selling price. But this effort to make sales of the item more profitable is promptly undermined by a well-intentioned marketing manager, who lowers the price of the item by 20 percent as part of a promotion. Show
Such uncoordinated and counterproductive decisions happen much more often than most retailers realize, and they are expensive. Many promotions don’t turn a profit at all, or at least they don’t add nearly as much profitable revenue as retailers expect. Addressing this conflict can quickly turn into a game of cat and mouse, in which retailers find themselves constantly chasing the next issue in a highly reactive way. Sometimes they simply avoid the problem by keeping prices low or making small adjustments across the board, in effect creating a permanent discount on their entire assortment. With better analytics, though, e-commerce retailers can create value by intelligently linking pricing and promotions based on optimal price setting and promotion design. We have observed, for example, several innovative e-commerce retailers increase revenue and profits by three to five percentage points using a highly differentiated analytics process and often achieve improved customer satisfaction and loyalty as well. Companies that effectively and profitably link pricing and promotions through advanced analytics engage in the following three-step process, which first determines customer price sensitivity, then gauges the likely effectiveness of promotions for every product, and, finally, links the two: 1. Use a wider range of factors to determine price sensitivityA price-sensitivity score considers the extent to which customers perceive a product’s price and, as a result, react to price changes. If a product has a higher price-sensitivity score, it means that a customer is less likely to accept a price increase. In this case, the price should be kept at a competitive level. (For more on dynamic pricing, see “How retailers can drive profitable growth through dynamic pricing.”) While most companies consider price sensitivity when they make pricing decisions, the scores often don’t incorporate enough factors and thus aren’t as accurate as they could be. The best price-sensitivity scores are calculated with advanced analytics, using input factors that take customer, competitor, and company considerations into account. For instance, price elasticity is based on different models for each product category, because customer behavior, including purchase frequency and reaction to price changes, differs for each product. By aggregating individual input factors for price sensitivity and promotion affinity, individual scores for each product category can be developed. With price sensitivity identified for all products, items are then grouped into three buckets based on their scores:
2. Build a clearer picture of where to target promotionsSimilar to the way they improve the accuracy of a price-sensitivity score, retail leaders need to rethink how they score promotions to better understand their impact on a particular product’s sales or profits. Promotion-affinity scores primarily measure the impact of earlier promotions in terms of transaction- and customer-based success factors and basket composition. The most important are increases achieved in revenue and margin. Depending on the specific situation, retailers can adjust the relative importance of five other factors: customers’ willingness to buy the product without a promotion, the increase in the number of transactions due to discounts, volume purchased of the product promoted, basket product variance, and any changes in buying behavior, such as more frequent store visits or larger baskets (Exhibit 1). Exhibit 1
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: Finding the right path through this complexity requires two things: an overview of each relevant key performance indicator (KPI) that needs to be understood, and a way to express the cumulative results of all relevant KPIs. This cumulative KPI—or “total customer effect” (TCE)—shows how much additional revenue or margin a promotion accounts for by looking at what additional sales (or gross profit) it generates and whether it actually brought more customers into the store or increased the value of their baskets. 3. Optimally link prices and promotionsTo make better pricing and promotions decisions, companies need to then combine both scores in a price-promotion matrix so that an optimal balance can be identified for each product being sold (Exhibit 2). Products are then placed into one of four quadrants of the matrix: Exhibit 2
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at:
One international online retailer’s efforts to closely link pricing and promotion decisions indicated a potentially quick payoff as soon as the first pilot phase was completed. Previously, the retailer sold about 80 percent of its assortment below the list price. Pricing required significant manual effort and was rarely transparent, which was a recipe for employee frustration. A lack of coordination with promotions not only created additional work but also caused the company to leave revenue and profits on the table. Also, the retailer wanted to build customer trust into its pricing and to boost perception of its brand, so an important aspect of its initiative was to design prices that would be consistent from the customer’s perspective. The team first tested the approach in five product categories in a single country for periods ranging from four to six weeks. After this pilot phase was concluded successfully, the bulk of the results were carried over to other categories and countries and optimized further. Motivated by this success, the retailer has since launched a pricing-and-promotions transformation across other products and countries. As a result, the company expects its sales revenue to increase by 3 to 5 percent and profits to grow by two to four percentage points over the three years following implementation of the approach. Also, its brand position has already improved and is far less dependent on discount promotions. Three prerequisites for successIn our experience with a number of programs for integrating pricing and promotion management, three areas play an especially large role in determining whether retailers’ plans succeed:
While these success factors and the skills to apply analytical methods and tools are vital, they don’t add up to a new pricing-and-promotion strategy on their own. In our experience, retailers find that such an overarching strategy emerges only from the mixture of science and art that takes place when analytical approaches are combined with individual managers’ capabilities and experience. As these new methods find increasing use in the future, opportunities to apply them will continue to expand—including to areas where links between pricing and promotions are still uncommon today, such as brick-and-mortar retail. What are the 4 types of sales promotion?Types of promotions. Product discounts. Offering discounts on products is one of the most popular types of sales promotions. ... . Loyalty programs. Loyal customers can contribute heavily to a company's success, and setting up a loyalty program is a great strategy for retaining customers. ... . Holiday promotions.. What is the method of sales promotion?Sales promotion letters, catalogues, point of purchase displays, customer service programmes, demonstrations, free samples, discounts, contests, sweepstakes, premiums and coupons are the commonly employed methods of sales promotion.
What are the 5 methods of promotion?What are the 5 methods of promotion?. Direct selling.. Advertising.. Public relations.. Personal selling.. Sales promotion.. What is an example of consumer promotion?Samples, coupons, premiums, contests, and rebates are examples of consumer sales promotions.
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