With U.S. retailers planning to spend nearly $10 billion on advertising this year and cross-industry ad spend projected to approach $240 billion, those outside of advertising agencies often wonder whether or not their companies are throwing away good money on print, broadcast, direct mail and Web promotions.1 Yet, many retailers today rely on beliefs, perceptions and emotions, rather than fact-based promotion management approaches that deliver more predictable and repeatable returns on advertising investment.
John Wanamaker (one of retail's early innovators who is credited with establishing the first department store and pioneering the use of price tags, money-back guarantees and newspaper ads) once stated that half of his retail advertising was ineffective; he just didn't know which half! Today, retailers need not face Wanamaker's dilemma. With POS scanning, real- time inventory visibility, availability of store-level daily item sales and profitability information, as well as sophisticated data mining tools and techniques, no retailer should be in the dark regarding the effectiveness of individual or aggregate promotion campaigns. Advertising plays an important role in building and retaining brand equity for retailers, but it can contribute much more than that. Effective promotion management is capable of driving increased exposure (footsteps, clicks and dollars) into a retailer's existing asset base in a profitable manner.
Over the past few years, companies such as NCR, Retek and JDA have developed merchandise management applications that allow retailers to optimize assortment planning, allocation, and shelf space and to better manage inventory, pricing and markdowns. Likewise, supply chain optimization solutions are omnipresent. Yet few companies provide solutions that allow merchants to understand the responsiveness of individual products or broad categories to specific retail marketing messages, discounts and promotions. Identifying and quantifying the financial return on the marketing expense, especially considering vendor funding and allocation issues, can be even more difficult. One of the key reasons: a lack of process and technology integration across the functional areas involved in the marketing decisions.
Recent research has shown that 70 percent of advertising has a measurable effect on product sales and that a single advertising exposure is all that is necessary to drive an immediate sales response. Yet successful marketing is about much more than just driving increased sales. Effective promotion management is the process of defining and tracking specific objectives for each and every marketing campaign, whether newspaper circulars, Web banners, broadcast, telemarketing or direct mail. It leverages information analytics to understand, from a historical perspective, the price sensitivity and ad responsiveness for items in past company ads and campaigns. This knowledge is then applied to project individual campaign performance, assess the projected return against well- defined goals and make fact-based adjustments when the need occurs.
Leading retailers such as Best Buy and Sears already leverage sales, advertising and customer information to improve their decision-making processes in the marketing arena. The next generation of retail innovators will do all of this and much more. Not only will they set and measure specific performance objectives for every item in an ad, they will also understand the cost/benefit tradeoffs associated with every component of the marketing campaign including prices and discounts, media selection, frequency of ads, lead times and delivery vehicle. They will leverage business intelligence tools to recognize changing patterns in shopper behavior and identify the point at which the costs of reworking, eliminating or adding campaigns are more than offset by the potential for incremental gain. Similarly, when supply exceeds projected demand, they will recognize the in- store adjustments that can be made in conjunction with the circulated advertising to drive excess inventory out of the store.
By analyzing the incremental sales and the net effect on margin contribution for each item in a specific ad, retailers can better understand how effective their current advertising processes are and what the improvement potential may be.
Figure 1: Individual Item Analysis
Once the performance of each item in an ad is understood, factual decisions can be made about how, when and under what specific conditions item or groups of items should be advertised in the future. As additional promotion campaigns are analyzed, data mining techniques can be used to determine which pages, offers and messages are most successful at meeting the targeted promotion goals.
Instituting such a dramatic shift in a company's approach to advertising is far from simple. In moving toward more effective promotion management, there are major hurdles to be addressed. Shifts in both technology and mind-set must occur to create company- wide buy-in to the new process. Often, those responsible for advertising view such a change as an attack on their abilities and skill, especially when the results of the first ad analysis show many of the items selected fall in the lower left quadrant of Figure 1. After a few cycles, however, when items begin to shift toward the upper right quadrant and start expanding into the area of previously unrealized opportunities, attitudes begin to change. As bottom-line numbers improve, they tend to shift from doubters to strong advocates within an organization and quickly earn backing from the financial team.
Beyond individual item analysis, the next logical step is to use an earned allocation model to determine the overall ad layout. In such a model, certain segments may be designated for image and branding, but the majority of ad space (and, therefore, cost) is allocated to the items and departments that can best meet specific goals of the campaign. This is determined through the analysis of historical performance against key goals such as store traffic, sales increases, margin improvement and inventory reduction.
Like any other major change initiative, a key to achieving a successful promotion management program is clear definition of both financial and operational goals and measures at the beginning the program. Equally important is ensuring the constant evaluation of progress toward those stated targets. As a retailer enters new markets, goals may be more focused on driving footsteps into new locations or driving traffic with the introduction of new product lines, brands or services. In more established footholds, focus may be on driving incremental margin. Toward the end of a season, focus may shift from increasing margin to reducing residual inventory to make room for new merchandise. By establishing specific goals for each individual advertising campaign, several key objectives can be accomplished: creating "newness" in advertising messages, helping the business run more efficiently and balancing short-term needs with longer-term strategic goals. This is critical because focusing on just one of these objectives is sure to hurt long-term growth by eroding brand equity and customer loyalty.
Utilizing a fact-based, promotion management program for making advertising decisions with a balanced focus on both economic and operational goals also expands the sphere of influence for advertising by creating a much larger constituency. Management will be pleased with better sales results, and inventory controllers will benefit from more appropriate stock levels throughout the year. Buyers will have better opportunities to introduce new products and lines while driving increased margins, and better understanding of item responsiveness can lead to improved purchasing practices.
In the near future, promotion management programs will become a key component in retail growth strategies because of their potential impact on inventory levels, sales volumes, customer mindshare and the corporate bottom line. The effects of this are beginning to appear even today. The CEO of one major U.S. retailer recently reported to shareholders at their 2002 annual meeting that the company's focus on improving promotional effectiveness through better analytics "to understand what is driving profitable revenue growth ... has been very key to improving margin performance over the last year." Expect to see more top executives interested in these types of programs as they understand the potential impact that promotion management can have on their bottom line.
1. Cardona, Mercedes. "Coen Predicts Slow Ad Recovery." www.adage.com. 3 Dec 2001.
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