Expert Column: How Grocers Can Optimize In-store Promotions
Most leaders across the retail industry agree that in-store promotional offers aren't as effective as they could be. Many of the promotional features are predictable and undifferentiated, resulting in declining consumer loyalty and response, with everyone spending more to get less traffic. Shoppers are trained to buy on standard offers like "10 yogurt cups for $10" or "two ice cream pints for $6," eroding both margins and brand loyalty.
As consumer volume becomes ever more deal-driven, retailers are losing. The problem cuts across manufacturers as well: The average CPG manufacturer spends 17 percent of U.S. revenue on these trade promotions -- totaling $300 billion -- yet the average promotional event loses as much as 50 cents on the dollar.
It's incredible that despite the staggering sums of money involved, there's still very little understanding of what promotions consumers truly find compelling. Manufacturers and grocers alike are left reading the promotional "tea leaves" or recycling offers, despite a recognition of their declining effectiveness. The good news is that recent advances in data science, predictive analytics, machine learning and cloud technologies are enabling a radically different approach to promotions.
You Can't Measure What You Haven't Tried
To date, the sector has had little choice but to plan promotional calendars based on historical performance –- an approach that fails to take into account constantly changing consumer behavior. While it's critical to measure where the money was spent, a backwards-looking approach is inherently limited to what's been done in the past -- and is by no means reliable for measuring what you haven't yet tried.
Finding the most effective offers that engage consumers requires trying new things, but blindly trialing in-store promotions with new discount levels and structures, imagery and copy is risky stuff. Margin-stretched retailers often lack the resources to pre-test offers through in-store pilots, and the costs of rolling out in-store promotions that might fail to perform better than the known winners of the past could lead to losses that can't be recovered.
Thinking beyond price to uncover offers that consumers actually care about is critical to pulling out of the discount downward spiral. Promotions that incorporate meaningful social and emotional drivers have been shown to outperform traditional promotions at the same or lower discount level. Pinpointing the winners, however, requires deep collaboration and knowledge sharing between brand manufacturers and grocers.
How can grocers and manufacturers work together to shake up the status quo and retire "tired-and-true" offers before their expiration date?
The Offline Opportunity of Online
The implications of recent digital and omni-channel trends go far beyond creating new channels for online sales. They provide a unique opportunity to break out of the price war and identify what moves a consumer to buy in a way that was previously only available to e-tailers. Online platforms such as Facebook, Google and digital coupon sites, as well as retailer websites and load-to-card mobile apps, provide an ability to digitally test many different offers with small groups of real shoppers, in a highly time- and cost-efficient way.
With this new approach, which we call "Offer Innovation,' we have seen the sector discover often surprising insights into what truly drives consumers to make a purchase decision. For instance:
- In many grocery categories, an offer of "buy one, save 25 percent on 2nd" drives an equal level of sales as an equivalent price-off discount that is 20 percent deeper. And, in certain categories, framing an identical offer as percent-off versus dollars-off drives as much as a 75 percent increase in consumer engagement.
- In one grocery category, adding a generic claim such as "Stock-up Sale" to a price-based offer hurts demand by nearly 10 percent, compared with an equivalent deal in which only the price message is communicated.
- In a food category, a small discount drove new users to trial a category, but discounting deeper only increased the purchases of "loyalists" who already often purchased the brand.
- With a common commodity produce item, by crossing a key price threshold in certain markets, one grocer saw a 43 percent decline in volume from a single penny change in the price of a product.
The Next Trade Promotion Frontier: 'Micro-testing'
Advanced data science and predictive technologies enable innovation of promotional offers at scale. Grocers can work with manufacturers to conduct real-world micro-testing, with hundreds or thousands of different offers going to small balanced groups of their shoppers who either buy or don't buy, with precise, unambiguous results that can be sliced by any number of dimensions, including demographic segmentation or geography, and ultimately inform individual promotional profiles for shoppers. Retailers can access a real-time view of test campaigns being run with their manufacturing partners, gaining insights that pave the way for more compelling, sales-boosting promotions for shoppers in brick-and-mortar stores, resulting in a win-win.
Getting more creative with offers is half the battle. Measuring real-world performance before making promotional decisions is the other. Offer Innovation offers a unique way for manufacturers and grocers to better understand their shoppers, unlocking the ability to deliver promotions that are more profitable to the business and more relevant to consumers.