Let’s face it, the world of retail promotions is often a shoot-first, aim-later environment, where merchants either just repeat last year’s promotions or randomly toss out desperate offers driven by trade fund incentives or competitors’ current offers. However, in an unprecedented retail environment where shopper behaviors and preferences bear no resemblance to those of past years, these "gut feel" approaches will fail on multiple fronts. They will either miss engaging increasingly fickle shoppers, undercut demand for more profitable items, or leave valuable margin dollars on the table by making an offer when shoppers would have paid full price.
Dynamic Markets Demand Data-Driven Decisions
Perhaps one reason retailers often default to triggering the same promotions year after year is because traditionally shopper preferences were relatively predictable: they've historically most preferred dollars-off offers, followed by percent-off and, lagging in third place, buy-one-get-one (BOGO). However, the persistence of economic uncertainty and changing shopper behaviors in the pandemic era has meant fundamental changes revealed by science-based price and promotion optimization science.
First, many shoppers have taken a significant income hit. A recent global shopper study revealed that 41 percent of consumers report having a lower income than they had pre-COVID. Not surprisingly, this means that price sensitivity is elevated, with 34 percent of consumers ranking price as the single most important factor in their overall shopping experience.
Retailers that aren’t tapping into science to show up-to-the-minute demand signals, price sensitivities and competitive elasticities miss out on crucial insights. Not only have shopper behaviors dramatically evolved during the pandemic, but shoppers will never revert to pre-COVID patterns. Therefore, retailers that fail to respond to today’s conditions will also lose out tomorrow.
Surgically Crafted Promotions
The always-connected, digital-native shopper famously surfs for promotions, and today promotions play a more strategic role than ever. While 34 percent of shoppers said they were extremely or very likely to wait for a promotional offer before making a purchase pre-pandemic, a whopping 45 percent report that they will be extremely or very likely to wait for a promotional offer post-pandemic. Furthermore, only 22 percent say they're not at all or not very likely to wait.
However, blindly offering a promotion that fails to connect with the shopper doesn’t achieve your business goals. It’s a shock to many retailers to learn that the historically No. 3-ranked promotion preference — BOGO — has rocketed to the No. 1 position in shopper offer preferences during the pandemic. Moreover, shopper demand has shifted on other fundamental fronts as well. For example, those Key Value Items (KVIs) where they pay most attention to prices and offers, which historically were relatively stable, have transformed dramatically.
Fortunately, productized science gives retailers real-time insight into item-level price sensitivity, down to the individual store or channel. This is particularly critical as heightened price sensitivity, coupled with supply chain havoc, have led more shoppers to try private-label brands, which they plan to embrace for the long term. Shoppers are pleasantly surprised not only by private label’s price competitiveness, but by their quality, which has resulted in more frequently placing private-label items into KVI status.
With science-driven promotions, retailers can make informed decisions about which offer types, vehicles and items to focus on to prioritize promotions that will truly accomplish their business objectives. At the same time, they know which offers won't align to financial goals and item strategies, enabling them to avoid offers that needlessly undercut margins or fail to resonate with shoppers. Finally, instead of blindly passing through every vendor deal on the table, they can accept the trade deals that are relevant and renegotiate, or decline, those that are not.
At a time when the retail landscape is rocked by seismic tremors, promotional offers play a more strategic role than ever. With data-driven insights, current KVI awareness, and more strategic private-label focus, retailers can carefully craft relevant, results-focused promotional offers, and peel away those that soak up vital execution cycles while missing the mark on defined financial and business objectives.
Cheryl Sullivan is the president and general manager of DemandTec, a company that offers lifecycle pricing solutions for retailers globally.