The Price of Austerity

Someone once said:  “Promotions are like heroin – best not to start.”  Of course, this is not true of all promotions, but it is increasingly true of price cutting promotions.  Here, it is the major retailers are becoming increasingly addicted to price cuts and most of the cost of this is being funded by their suppliers.

I have worked with one famous FMCG company who are spending £10 million a year on brand building activities such as advertising but £100 million on trade price support.  Curiously, they spent a lot of time and effort analysing the effectiveness of the £10 million spend – for example, they knew the sales response they could anticipate by changing their advertising investment – but devoted little effort to analysing the £100 million trade price support spend and how they could improve the efficiency and ROI from this.

This is not uncommon across many companies.  I suppose that more often than not this expense is regarded as a “cost of doing business” with the big retail groups and therefore unavoidable.

If it’s an unavoidable expense, then why bother with the effort of analysing it?

Even though the spend on trade price promotional support is often impossible to avoid, it still brings potential dangers in its wake, not just the danger of undermining the brand’s positioning carefully built up over the years, but also the serious danger of plunging the business into losses if the sales uplifts fail to cover the price support costs.

And given the highly competitive nature of today’s marketplace and the focus on the next promotion, the amount of time and effort devoted to analysing past activity becomes difficult to sustain.  But if you do put in the effort, the immediate returns can be quite spectacular.

The charts below help illustrate this.  This is the end result of an analysis of the effectiveness of price promotions for the same brand in two major retailers across the same time period.  The price reductions are similar, but the resultant sales uplifts vary wildly and the proportion of loss making promotions is much higher in one retailer than the other.

Comparing ROI   performance on similar price promotion programmes across two major retail   chains – on the left, mainly positive ROI performance, but on the right it is   mainly negative

This kind of analysis and comparison creates the stimulus to go further and understand why there are these differences and the determination to align the performances across retail groups and create better short term commercial returns.

Most companies that have done this and reshaped their price support plans have generated an immediate improvement in ROI of at least 15%.

There’s nothing clever about losing money on price promotions – nobody gains in the long run.  Data driven analytics helps pinpoint where you are losing money and helps you determine how to reshape you trade price support programmes to stop the losses.

The quickest way to make money is to stop losing it.  Now, why wouldn’t you want to do that?