Designing a promotional strategy that
works for apparel retailers
Francesco Fiorese
Kristen St. Martin-Lipton
Michelle Verwest
June 2014
www.simon-kucher.com
Consumers’ purchase behavior for fashion and apparel goods has evolved in
the post-recession period. Although global apparel sales pushed ahead in
2012/2013, growing by 6% to reach US$1.7 billion1, consumers have become
more conservative due to the fragile macroeconomic climate and continue to
place importance on promotions when it comes to their apparel purchase
decisions.2
For retailers around the globe, this behavior has meant intense competition for
a decreasing share of wallet and has translated to a steady increase in promotional activity. A recent statement in a Women’s Wear Daily (WWD) article
reflects the strategy of many retailers these days:
85% of adults
identify promotions as an
important factor in their
purchase decisions2.
“To capitalize on the available traffic,
Express extended the duration and
depth of discounts and was satisfied
with its effort to clear inventories…”3
But inundating customers with consistently broader and deeper promotions is
not necessarily the answer and excessive promotions have been proven to hurt
retailers’ bottom lines (see Figure 1). Gone are the days where deeper and
broader is sufficient to draw in loyal customers and achieve desired sales and
margin targets. Retailers must instead respond to this change in consumer
behavior with promotional strategies that guide targeted customer segments
through a migration path, linking the strategy to the objective for each customer
segment to increase customer loyalty, and, therefore, the overall health of the
business.
1 Euromonitor International
2 NRF Monthly Consumer Survey, January 2014 - May 2014
3 Arnold J. Karr, Lululemon Joins Fray with Cut to Forecast, WWD, January 13, 2014
2
Impact of promotions on apparel retailer bottom lines: Q4 2013 Financial Reports
Q4 2013 results
The Gap
Gross Margin dollars down
280 basis points
Marks &
Spencer
Falling clothing sales for
10th quarter in a row
Levi Strauss
& Co.
Gross margin dollars down
180 basis points (US $12M)
J. Crew
Gross margin rate down
160 basis points
Driving factors
“Unusually promotional holiday season¹”
“Heavy discounting that took place before
Christmas” with prices slashed by as much as 50%²”
“Increase in price promotion and mark-down activity”
due to a slower holiday season”
“Promotional environment and actions taken to move
through the inventory to make sure we ended the
quarter with current inventory and that we weren’t
carrying a lot of inventory³”
1 Gap Inc. Earnings Call, February 27, 2014
2 Bloomberg, January 9, 2014
3 David Moin, Headwinds Persist as J. Crew Enters Spring, WWD, March 25, 2014
Figure 1
Simon-Kucher has identified four promotional strategy foundation steps that
retailers should consider when designing promotion plans:
1. Define promotion strategy and principles given
objectives and targets
2. Support promotion principles with analytics
3. Educate the organization and draft a promotion plan
4. Track promotion success
1. Define promotion strategy and principles given objectives and targets
Promotions can successfully drive desired behaviors and meet varying objectives for each target customer segment. For example, the objective of promotions may be to drive value and volume for one customer segment but penetration and purchase frequency for another (see Figure 2). Before planning any
promotion activity, a retailer should first define how objectives vary by customer
segment, keeping in mind product category (shirts, pants, etc.), channel (i.e.
Factory, Retail, Web) and time of season (e.g. opening, mid-season, sale). At the
end of the day, the type of promotion used to increase basket size of infrequent
customers will look very different from the promotion used to minimize cannibalization risk but maintain the brand image for loyal customers.
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Mapping promotion strategic objectives to customer segments
Increasing the number of shoppers
who purchase the product at least
once in a given period
Purchase
frequency
Increasing the number of times
the shopper purchases the
product within a given period
Purchase
volume
Increasing the volume bought
by the shopper at any time
Purchase
value
Increasing the shopper’s spend
per unit of volume
P
Product category
Penetration
Customer segment
A
B
C
D
1
Value
Volume
Volume
Frequency
2
Value
Value
Frequency
Penetration
3
Frequency
Frequency
Penetration
Penetration
4
Volume
Volume
Penetration
Penetration
…
Figure 2: Defining promotion objectives by segment - example
Once objectives are defined, promotion principles should be established to
guide the design of a promotion plan. The principles should document goals
and decision factors, including:
Illustrative
Seasonal goals
Drive purchase volume in the middle of the season;
drive turnover at the end of the season
Channel goals
Promote turnover in factory stores with deeper
discounts
Depth factors
Maximum discount allowed is 40% - going deeper
does not lead to incremental unit lift
Frequency factors
Limit number of promotions to 2 per season to
prevent shoppers from adjusting their purchase
habits to wait for future discounts
Vehicle factors
Implement a minimum purchase requirement on all
promotions within retail stores to drive basket sizes
…
Figure 3: Defining promotion principles - example
2. Support promotion principles with analytics
The best promotion principles are supported by analytics. Analytics not only
ensure a retailer is using the most effective promotion type, but also help with
change management and building internal buy-in of the promotion objectives
across the organization. Common sources of analytics include:
• Historical data analysis
• Management level or store associate surveys
• Customer research
• In-store market tests
+78%
4
How does a retailer know which source will work best for their given situation?
There is a tradeoff between the level of sophistication and resource requirements behind each source. However, a best-in-class approach will utilize historical data analysis and incorporate in-store market tests.
For historical data analysis to be worthwhile, a retailer must first ensure that all
promotions are tracked systematically and that unit sales and price points can
be tied back to specific promotions. Once a systematic tracking process is in
place, historical data analysis can provide insight into the right depth, frequency
and vehicle to use, building a foundation to support promotion principles.
Simon-Kucher project example
Simon-Kucher recently used historical data analysis to help an apparel retailer,
whose goal was increasing inventory turn within one of their main categories
(Category 1 in Figure 4), realize that deep discounts actually cannibalized sales
and that the category required fewer discounts than other categories. As displayed in the following chart, Simon-Kucher helped the retailer discover that the
demand for Category 1 was almost twice as elastic as all other categories,
meaning less deep discounts could achieve a similar inventory turn as that
achieved for all other categories.
Post promotion analysis: Average weekly performance
300%
Revenue Lift
Volume Lift
250%
Category 1 demand was almost
twice as elastic as all other
categories, meaning that less deep
discounts in category 1 could
achieve similar inventory turn
200%
150%
100%
50%
0%
Category 1
Promotion
discount
25%
All other categories
30%
Figure 4: Historical data analysis - example
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Keep in mind, though, that analytics should not be the final decision factor in
setting a promotion plan. Expert judgment and historical experience should
always be combined with the results of any promotion analysis or in-store
test.
Clearance pricing strategies at Zara4
Zara is a Spanish-based fast-fashion retailer belonging to the Inditex group,
selling its products through 1800+ stores in more than 80 countries worldwide. In FY2013 net sales amounted to €10.8 billion.
Clearance periods. Zara has winter and summer clearance periods, which
require a large amount of stock withdrawn from its stores during regular season periods to be redistributed to its network. This happens over several
weeks before the beginning of each clearance period. Throughout the clearance period, prices need to be adjusted to minimize the inventory left for
liquidation at the end of the period, when it will have to be sold to wholesale
buyers targeting low-price channels, mostly in developing countries.
The pricing strategy aggregates products into homogenous clusters, characterized by the same product type and retail price. Clusters within a given
price range are aggregated into categories, which are assigned a clearance
sales price, which is to be updated on a weekly basis throughout the clearance period.
A data-driven pricing strategy. In 2009 they carried out a pilot study in
Europe to test a statistical model to optimize markdowns across different
product ranges in womens apparel. This model acted as a decision support
tool to recommend target prices for test groups in Ireland and Belgium, and
was closely adhered to by the involved country managers. Product groups
priced according to the model performed better than control groups, yielding an estimated increase in clearance revenues just shy of 6%.
The model was fed historical data from regular season periods and clearance sales from previous year, and performed a regression analysis to forecast the expected demand for each product, and fix prices accordingly. After
the successful pilot study the model was implemented by Zara’s IT department, and made available to country managers worldwide as the standard
markdown pricing tool for pricing recommendations, sales predictions, and
revenue projections.
Takeaways. This success story points out the importance of data-driven decisions when it comes to choosing the right price for promotional items. Even
if at the end of the day choices lie with the management, adequate decision
support tools are key to boosting performance.
4 OPERATIONS RESEARCH Vol. 60, No. 6, November–December 2012
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3. Educate the organization and draft a promotion plan
Once the principles and analytics are in place, a retailer should institutionalize smart pricing and promotional planning through internal education and a
comprehensive plan. The most effective promotions for each target segment
and product category should be communicated across the organization. By
combining the strategy, principles and analytics, retailers can build a proper
pricing and promotion plan, outlining the promotion tactics (i.e. the type of
promotion, depth, frequency and time of season) and communication methods for each category and channel by customer segment. Frequent checkins (e.g. weekly meetings) between the owners of different marketing and
promotion initiatives can avoid too frequent price communication with customers and prevent promotion fatigue.
Promotion plan by week
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Category A
Retail
stores
Category B
Category C
Category D
Category A
Ecommerce
Category B
Category C
Outlet to promote excess
retail store inventory from
prior season
Category D
Promotion tactic and communication methods
No promo
Multi-buy email campaign
Clearance section
25%-40% off in-store &
on-line coupon code
>40% sale section
15%-24% off in-store &
on-line coupon code
Figure 5: Promotion plan - example
4. Track promotion success
Retailers should establish procedures for tracking effectiveness of the promotion plan and have contingency plans in place as needed. Commonly
tracked KPIs include week-over-week unit sales comparisons, incremental
revenue, margins, store traffic, etc. However, a best-in-class measure of promotion effectiveness will also consider the impact of the promotion on other
product categories (both unrelated and complementary) not directly included in the promotion. By looking at the effect a promotion had on an overall
portfolio, a retailer can ensure that a promotion is successfully achieving objectives and use the learnings to influence future promotion plans.
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By applying these four promotion steps, retailers can effectively design their
promotional strategies to attract customers in today’s challenging competitive environment while maintaining long-run profitability. An effective promotion strategy is especially important for retailers today, considering the importance customers place on promotions and affordable prices when making
apparel purchase decisions. By understanding their customer segments and
providing a clear structure and communication for promotions, retailers can
rise above the clutter and strengthen their business with healthier, more sustainable margins.
About the Authors
Francesco Fiorese
Director at Simon-Kucher’s Milan office
Francesco has extensive experience in strategy and pricing for consumer
and manufacturing companies.
email: francesco.fiorese@simon-kucher.com
Kristen St. Martin-Lipton
Senior Consultant at Simon-Kucher’s New York office
Kristen has vast experience designing pricing and promotion strategies for
global consumer and retail companies.
email: kristen.stmartin@simon-kucher.com
Michelle Verwest
Senior Consultant at Simon-Kucher’s San Francisco office
Michelle has nine years experience “on the ground“ in the apparel retail
industry: working in strategy, merchandising, and planning for multiple
apparel retailers.
email: michelle.verwest@simon-kucher.com
About Simon-Kucher & Partners
Simon-Kucher & Partners is a global consulting firm with 700 professionals in 27 offices worldwide focusing
on Smart Profit GrowthSM. Founded in 1985, the company has almost 30 years of experience providing
strategy and marketing consulting and is regarded as the world’s leading pricing advisor.
www.simon-kucher.com
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