The 68% Off Story: Part II

June 25, 2014

discounts

A few days ago I posted a real-life story about buying my favorite ground coffee at 68% off regular retail from a local supermarket. For those of you who are new to this story, you can check it out here. This topic seems to have struck a chord because many of you have emailed me after the post to share your experience dealing with aggressive discounting.

The “68% off” story is indicative of a larger trend of retailers fighting for declining store traffic by discounting aggressively. Why is store traffic such a drag for so many retailers? Beyond the well-documented trend of more and more consumers buying online (who can resist the convenience of shopping 24/7), another contributing factor is that specialty retailers are becoming less specialized. Yes, I am talking about Home Depot selling toilet paper right next to power tools, and Staples selling deodorant sticks.

But is discounting aggressively the right and most profitable lever to drive traffic? Our experience would say too much of a good thing can be risky for the bottom line. When a retailer approaches us to help them optimize their promotions, it’s not difficult to find low-hanging profit improvement opportunities. For example, we helped a department store chain surgically reduced “bad” promotions to achieve a 15% improvement in profit. So, where do we typically find “bad” promotions?

  • Too many consecutive weeks: This is particularly relevant for supermarkets where more or less the same shoppers visit weekly. While many supermarket deals are weekly, some also run multi-week events. Not surprisingly, we see the first week achieving the highest revenue lift. The surprising insight is that the subsequent weeks often generate minimal volume lift and negative margin dollar impact.

Rule of thumb: For retailers with high trip frequency, longer events are not always better.

  • Too predictable“We can’t change them. Our customers have grown accustomed to our big events each year.” Being too predictable hurts you in 3 ways:

    • Before the sale: We have seen up to a 20% dip before such an anticipated event because loyal customers are trained to wait for it.

    • After the sale: It is not uncommon to see baseline sales lower by 20-30% due to stockpiling by your loyal customers who are trained to buy at the discount.

    • Next time you run the same sale: If you have run the same 30% off event year after year, 30% off becomes the baseline and the excitement wears off.

Rule of thumb: Change it up! Adjust when you promote, how long you promote, what you promote and how you promote. For example, if you did 30% off last year, try a tiered offer (for example, 20% off purchase of <$100, 30% off <$300, 40% <$500) this year.

  • Too broad: “50% off everything in the store.” Really? Yes, that’s a very easy to understand message, but you are leaving money on the table.

Rule of thumb: Promote the traffic drivers in your portfolio to get people in the store, and merchandise complementary items right next to the display of discounted items. A classic supermarket example is putting a stack of full-priced salsa dip next to a wall of discounted tortilla chips. The Old Navy super popular $1 Flip-Flop sale is a great example of how a retailer uses one item to drive buzz and traffic. For more details, check out this Forbes article.

Cleaning up bad promotions is beneficial, and the rules of thumb are not rocket science. But many retailers don’t follow them because continuously fine-tuning your promotions requires a lot more than just doing the math. It takes a village. In part III of the story, I will cover the process and organizational aspects of the promotion excellence journey.