Customer Centricity and Profitability: The Equations Driving Success in ‘Year of Promotions’

If records are made to be broken, then they served their purpose well during the Thanksgiving 2016 holiday shopping weekend. Cyber Monday sales reached an all-time high with $3.39 billion spent online — a 10.2 percent increase over 2015, according to Adobe Digital Insights. This marked the largest online sales day in history, narrowly surpassing Black Friday’s online sales record of $3.34 billion, up 21.6 percent year-over-year.

As fast as retailers and industry pundits could cheer the record sales, though, the sobering reality became clear: Full price sell-through is more a fallacy than ever this holiday season. Promotions dominated holiday shopping and retailers are spending more than ever to attract shoppers’ attention, a profit-eroding combination that's likely to impact retailers’ bottom lines long after the New Year. According to the DynamicAction Retail Index, orders using a promotion (e.g., “buy one, get one” or “40 percent off”) were up 49 percent YoY on Cyber Monday 2016 compared to 2015, and up an average of 37 percent for Cyber Weekend (Thanksgiving Day through Cyber Monday).

That’s just the beginning, though. Marketing costs increased a staggering 150 percent on Cyber Monday 2016, and up an average 101 percent over Cyber Weekend compared to 2015. Apparel and footwear retailers, in particular, increased their marketing spend before and during the holiday shopping weekend with the largest upward trends occurring in paid search, display and affiliate marketing to attempt to cut through the clutter of holiday promotions.

Even in this new reality of ever-increasing promotions, discounts and marketing spend, innovative retailers that understand their customers and have the ability to take action on their data are finding ways to answer consumers’ expectations profitably. Here are a few key learnings to employ:

Increase Data-Driven Marketing Outreach
The best-performing retailers this holiday season have focused less on brand advertising and more on targeting direct “hand raisers” or inferred “hand raisers.” They're focusing spend on past site visitors and former customers through retargeting, audience targeting and other data-driven outreach mechanisms. More sophisticated retailers are also better utilizing their own CRM data to drive holiday sales success by connecting with lapsed customers or customers who purchased only during the 2015 holiday through search, email, display and social. This tactic finally paid off, with first-time buyers converting to second-time purchasers at a 5 percent higher rate from Thanksgiving Day to Cyber Monday 2016 vs. that time period last year.

Don’t Let Stacked Promotions Kill Profitability
Retailers should take a close look at their promotions over the holidays, and what offers are being shared in each channel. There was a sharp rise in affiliate marketing costs over the weekend, and benefactors like eBates and RetailMeNot led the shift. Consider what this means when combined with the promotions that retailers already have in place.

For example, a shopper searches online for a pair of shoes and clicks through a paid search link to the retailer’s site (for which the retailer pays). The consumer sees a promotional offer, and then visits an affiliate site to see if an additional discount is available. She clicks through the affiliate site, gets the affiliate’s promotion and receives the retailer’s direct promotion on the website. Plus, there's likely free shipping offered on top of this. It’s a great deal for the consumer, but the retailer’s profit margin quickly erodes in this common shopping pattern.

Align Demand With Inventory
Many retailers exited the 2015 holiday season painfully overstocked, with 41 percent more inventory not sold in the first quarter of 2016 vs. the first quarter of 2015. Therefore, attention to tightening up inventories over the next month will be crucial for avoiding markdowns and improving profits in 2017. Coming out of Cyber Monday 2016, retailers are holding slightly less inventory (down 3 percent) this year than 2015. Even more important, they’re doing a better job of holding the stock that shoppers actually want, with a 6 percent increase in the inventory that shoppers are viewing available on site. This not only provides a better customer experience, but helps retailers align true demand with available inventory, ensuring fewer out-of-stocks while also reducing overstocks (and the resulting markdowns).

Understand Your Free and Express Shipping Thresholds
Rather than offer free shipping to every shopper, test shipping thresholds at various order sizes ($50, $100). Now is also the time to consider brand and product affinities — e.g., packaging a hot-selling item with a complementary item that may not sell through organically. Encourage promotional buyers to purchase another full-price item that they have the affinity for in the same order to reach the free shipping threshold. Don’t rush to upgrade expedited shipping. Orders using express shipping were up 10 percent YoY on Cyber Weekend, showing that the customer expects to receive an order in two days and is willing to pay for it — even when the gift-giving deadline is not right around the corner.

While it's true that full price sell-through is an illusion this holiday season, what is clear is that promoting and marketing wisely — with an understanding of your customers’ true motivations and a laser focus on your desired profit margin — will be key to success in the months and year ahead.

Sarah Engel is the senior vice president of global marketing for DynamicAction, an advanced analytics software that helps retailers make better and more profitable decisions in order to get to action faster.