The 3 Core Problems of Trade Promotions

“25% off”, “On sale”, “Buy 1 get 1 free” – measured by their ubiquity, consumer good companies cannot seem to survive without trade promotions. Research shows that this is true: 60% of the CPG marketing budget is allocated to trade promotions. However, they have turned into a necessary evil especially for consumer goods companies as two thirds of promotions do not break-even. Promotion optimization thus remains a huge potential for consumer goods companies.

Overall, designing promotions with beneficial effects is difficult. Currently, trade promotions have three core problems:

1. Trade promotions do not meet their KPIs: 84% of companies believe they are getting little or no incremental value from their trade promotions.
2. Trade promotions are neither predictable, nor repeatable: professionals too often lack market transparency and an ability to forecast: Only 12% of companies feel their analytical capabilities are in line with those of their trading partners.
3. Trade promotions have counteractive effects: Only 33% of promotions break even, according to Nielsen. Moreover, excessive low-price strategies can result in brand dilution. It comes as no surprise that customer loyalty is especially low where promotions are very frequent.

The four roadblocks to successful trade promotions

What are the underlying drivers that cause trade promotions to be unsuccessful? Four key factors are undercutting the success of trade promotions:

🔎 A lack of data transparency impedes evidence-based decision-making processes. For promotions, transparency regarding one’s own prices at the point of sale as well as competitor prices is essential. Unfortunately, sales channels, products and their features can be difficult to disaggregate.

⚙️ Inconsistent execution across channels inhibits the application of valuable learnings from past promotions at scale. Sharing and scaling valuable insights across the organization is of the essence to sustain success and avoid a constant hit-and-miss approach.

⌛ Inadequate scopes and frequencies of promotions can have detrimental effects on both short-term KPIs such as a revenue uplift and long-term KPIs like brand equity and profitability.

📃 Incoherent methodology makes disaggregating all relevant factors that influence pricing decisions difficult. This can include changes in one’s own and competing product portfolios and competitors’ price changes and promotions.

Overcoming these roadblocks becomes exceedingly difficult with today’s toolsets. All too often do revenue and promotion managers rely on Excel models which are ill-equipped for solving the issues above.

Figure 1: Consumer insights without Buynomics is a long and incoherent process

How Buynomics addresses trade promotions’ biggest problems

✔️Buynomics leverages machine learning and behavioral models to create a >95% accurate model of shopper behavior. This allows promotion managers to anticipate very accurately how their promotions will perform and thus enables the drivers of trade promotions’ success:

✔️ Buynomics combines different data sources into coherent and transparent insights. Products are always analyzed upon their individual components, allowing to capture effects reliably if they are changed. The influences of different sales channels and competitors’ moves are also being accounted for.

✔️ Buynomics can be used in various sales channels and for a multitude of products. Its intuitive and adaptive design allows for its application across the board, resulting in comparable and robust insights.

✔️ Buynomics can detect and avoid inadequate design and frequency of promotions before they are launched. Thanks to the Virtual Shoppers managers can test unlimited price combinations and their effects on revenue and profit within minutes.

✔️ Simulations in Buynomics always follow the same principles and deliver transferable insights. Relevant data from various sources shape a single sample of Virtual Shoppers that mirrors the behavior of actual customers. Even if multiple factors inside or outside the managers’ sphere of influence change, the way of assessing their impacts remains coherent.

Using Buynomics for promotion planning instead of traditional tools has a direct impact on your business. Meeting campaign KPIs is much easier with accurate forecasting across your channels. Further, being predictable and repeatable greatly improves the efficiency of your promotions.

Figure 2: Buynomics forecasted how shoppers would react to two entirely different pricing scenarios with an accuracy of >95%

Summary

Trade promotions are a double-edged sword: on the one hand they help gain temporary market share, on the other hand, most promotions do not generate any profits. Even worse: shoppers get used to constant discounts, perceiving unnaturally low prices as the new standard, undercutting both brand equity and shopper loyalty.

While abandoning promotions is not a viable option, they bear a lot of potential for improvements. Data transparency, consistent execution, coherent methodology and an adequate scope and frequency are four important prerequisites for successful promotions.

Buynomics, a SaaS-based platform creates trade promotions that create actual value. Managers can test promotion designs with a sample of Virtual Customers that behave just like customers in the real world. The effects on profit and revenue are instantly visible. Your competitor’s moves can be easily integrated into the analysis as well. Thanks to its unique capabilities, Buynomics helps to meet campaign KPIs and avoids unwanted effects.