Whatever your industry, the global market is becoming increasingly competitive and the technological advancement that has made manufacturing products easier and more cost effective is breaking many long-standing monopolies. In response, promotions and new products are critical to surviving in this hyper-competitive environment. And for us as demand planners, that presents new challenges. So, what do we need to do to effectively forecast promotional sales?
An example of this increased competition is the mobile phone market which, some decades ago, was led by just a few companies but is now a highly competitive space with multiple players. Social media also plays an important role in bringing awareness through commercials for existing products and new innovations or initiatives developing a sizable customer base. As competition keeps amplifying, it is essential that new product development keeps pace to maintain market share. When such market forces are fighting with each other, organizations come up with different ways to compete and the most common is promotions. Clearly, promotions dilute profit margins but help companies maintain or gain market share.
Black Friday has forced companies— mainly FMCGs—to participate, irrespective of the impact on their P&L
Offering Promotions That Don’t Erode Profit Margins & Brand Value
One of the very good examples which is especially relevant these days is ‘Black Friday’ which has become massively popular in recent years. Such an event has forced companies— mainly FMCGs—to participate, irrespective of the impact on their P&L. Therefore, promotions planning should be designed in a way that is attractive to consumers whilst maintaining the value of the portfolio and protects profit margins. I have spoken to companies that have over-planned their promotions to the extent that consumers now only buy the product when it is promoted. Many companies tend to over-promote products for short term gains which later backfires. So how we do we find the right balance of remaining competitive without debasing our brands and eroding profit margins?
Tracking Demand For Promotions
First of all, we need to keep in mind that promotional activities are a variable factor on top of your base demand. Base demand is simply the organic run-rate excluding any activities. In this base demand, promotional activities that ran in the past are stripped out from the actual historical data. So, can the difference between base demand and activities give the right signal of promotional demand? The answer is NO because the behavior suggests that consumers nowadays are adapting what is called ‘Smart Buying’ where they look into many factors to decide on their purchase. That could be price, product differentiation, shelf life, health factors etc.
Calculating Difference Between Baseline & Activity Doesn’t Work For Promotions
Let me give you a personal example from a few days back when I was at Hyper Market and I picked up a renowned brand’s washing powder. After just a few steps, I found another renowned brand offering a 20% lower price so I put the first one back in the shelf and picked up the second one. This was not the end because when I walked to end of the aisle, the store staff walked in the aisle with a pallet of another popular brand and just out of curiosity when I asked him for the price, it was actually 50% less than the first one. He told me this promo is for a very limited time so I decided to pick more than one pack of the third brand which means I have enough stock for next 3 months.
Calculating the promo hike only by taking the difference between base and activity performance can be misleading
Taking my example as a regular consumer, the indication the third washing powder company will get is that sales during promotions rise but it’s actually not the right demand indicator as I had decided to stock the product. So the demand uplift is not a shift of consumer from another brand but rather an incremental demand for the period. This is usually true for products that are fast moving consumer goods with considerable shelf life. Hence it is a complicated job for companies to plan promotions. Calculating the promo hike only by taking the difference between base and activity performance can be misleading and there should be further granular analysis done to understand the number of assumptions behind actual demand increase.
You Need Sales & Marketing Involved For Promotions Planning
It is very important to involve both the sales and marketing teams when planning promotions. Forecasting promotional demand is not something that can be done by just the demand planning function using statistical models. Here comes the importance of Demand Sensing which involves key factors like market shifts, weather changes, natural disasters, consumer buying behavior etc. In this example, it is the consumer buying behavior that plays an important role in deriving the promotional demand which needs to be understood in depth through various analyses. Companies need to have market data of competitors that have run similar promotions and acquire the point of sales data to serve as a point of reference along with providing understanding of future sales after the promo is off the shelf so production and stocks can be well managed. The last thing a company would want to face is out of stocks before the promotion period is over. Remember that stock management should take into consideration a substantial dip after the promotion is over.
You Must Track Sales Of Promotional V.S Non-Promotional Products
A rule of thumb for the team involved in the promotions planning is ‘promotions are time and quantity bound’ which means that the promotional calendar established by the marketing department goes through a financial sign-off. The aim of the promotional calendar is to support the product category for a limited time with limited quantity to gain a certain percentage of sales and create momentum for products that are newly introduced, slow moving or that have strong competition. Consequently, these activities require micro management. What some organizations face is that the moment promotions are announced, the sales force is completely dependent on promotions to boost sales and are unable to maintain a balance, over-looking the promotion intensities, i.e. the percentage of promotion over non-promotion for a particular product or category. And when this indicator is overlooked, it has a direct impact on the bottom-line so there are some key control points that needs to be in place; a close monitoring of the promotional quantities vs. the non-promotion and any deviation to the agreed plan should immediately be flagged to take necessary action on the order supply for the next period. This will also keep our commitment to retailers and consumers as per the promo period timeline. If stocks run-out half way through, it can result in penalties which of course we need to avoid.
Don’t Forget To Give Promotional Products A Unique SKU
A unique stock keeping unit item code is necessary to track the performance and should be activated every time the promotion kicks in. Having a single code will make it difficult or impossible to know the actual promotional consumer uptake beside the promotion itself; other factors like seasonality could also be the reason for a change in demand. The monitoring should be in daily (or maximum, weekly) buckets in comparison to the forecast so there is enough reaction time.
Lastly, I will conclude by saying that promotions are something that should not be planned to fill the gap for the growth percentage that the shareholders want to see or that you have agreed with management, rather it should be an activity fed into your plan to bring incremental growth on top of organic growth. That’s how we avoid a race to the bottom, and protect your profit margins and your brand value.