Promotions in the Retail Industry
Study elaborated by Simon-Kucher & Partners
in collaboration with Sartia (Extract)
Philip Daus, Tim Brzoska
Madrid/Bonn March 2011
Bonn office
Haydnstr. 36, 53115 Bonn
Tel. +49 228 9843-0, Fax +49 228 9843-380
E-Mail: tim.brzoska@simon-kucher.com
www.simon-kucher.com
Executive summary
Every year the Spanish retail sector invests more than 4,700 million euros in promotions. Price
promotions are used by 80% of the companies.
Promotional discount levels used are very high: 69% of companies use discounts of 20% or
more, and on average 25% of all products are on promotion.
Only a minority of companies focus on profitability as a primary goal of the promotion,
approximately 3 out of 4 promotions have a negative ROI. The excessive focus on revenues and
volume (the obsession with market share) results in a vicious circle of price decreases, which
reduce margins across the whole industry.
According to respondents, to improve the management of promotions, you have to concentrate
particularly on defining objectives and on monitoring the effects of promotions; 45% of
companies do not set specific targets for sales, and only 2% use essential KPIs, for example, for
measuring postponement of purchase and storage.
In our experience, there is also considerable potential for improving the definition of discount
levels. Only 1 out of 10 managers correctly consider the effect of the discounts on profits! Likewise,
only 1 out of 10 companies measure promotional elasticities, price thresholds and substitution
effects. Without considering these topics, it is impossible to predict and measure the effect that the
promotion will have on revenues and profits.
© Simon-Kucher & Partners 2011, Competence Center Consumer Goods & Retail, Philip Daus
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Price promotions are used most often
All the participant companies have used some type of promotion during the year. Price promotions are
the most popular, used by 80% of participants.
Types of promotions used by companies
«Discount of 50%."
«New price €4.90."
Price promotions
«Free T-shirt with the purchase of
the product."
Gifts
«Points or credits to be
exchanged by products or prizes."
Loyalty program
«Buy 3 units and get one extra
unit for free."
Volume discounts
«Buy products A, B and C
together with a discount of 20%."
Bundling
«Buy 3 products, instead of €3.00
pay €2.50."
Multibuy
«Extra 50gr for free."
«Raffles"
«Free transport"
Packaging offers
Others
Do price promotions achieve the desired effect?
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221
© Simon-Kucher & Partners 2011, Competence Center Consumer Goods & Retail, Philip Daus
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For almost half of promotions there are no clearly defined objectives
A total of 45% of the companies don’t set clear objectives for promotions. The increase of revenue and
volumes are the most important priorities, unlike profitability, which for them is less relevant.
Do they set objectives?
Objectives’ relative relevance
Turnover increase
No, never
4,2
Volume increase
4,0
Attract new customers
Only in
superficially
Yes, for
each
promotion
3,8
Traffic increase in shops
3,8
Increase customer loyalty
3,6
Stock rotation increase
3,6
Brand value increase
3,2
Improve price image
Maximize profitability
3,1
2,9
The main goal of promotions should be overall profitability, while focusing excessively on
revenue and market share can lead to dangerous price wars!
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221
© Simon-Kucher & Partners 2011, Competence Center Consumer Goods & Retail, Philip Daus
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Several criteria help to choose the right product (2)
… but only 15% of companies said that they are measuring elasticities and only 5% of them measure
the effects on other products (cross-price elasticities).
?
Before setting the price or discount of a product it is necessary to quantify the effect on
the volume of this product, other products in its category and global sales.
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
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The discounts are round and very high
By analyzing the frequency of each level of discount, it is outstanding that almost all companies always
apply round discounts and the level is usually very high.
Distribution of discounts in price promotions
23.4% of all promotions are
made with a discount of
20%.
Companies apply almost
exclusively round discounts.
69% of the promotions are
made with a discount of 20%
or higher.
The discount of 20% is more
common: Is it a psychological
threshold?
Nivel de descuento
To select the right level of discounts it is necessary to analyze elasticities and price
thresholds.
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Otros: 5%
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
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Non-application of Value Pricing to define the promotional discount
In practice, only few companies measure elasticities and thresholds, so it is impossible to predict the
effect the discount will have on volume.
Aspects considered in the setting of the discount level
Cost-plus margin
Habit and intuition
Competitors
Value pricing
Considering costs and prices of competitors is not enough. Companies can’t optimize
their promotional management without measuring promotional elasticities.
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Otros: 5%
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
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Managers underestimate or ignore the negative impact on profit
Alarming: 9 of 10 managers underestimate or ignore the necessary increment in volume to compensate
for a price reduction!
Estimations of the impact of the price promotion
8%
Strong overestimation
2%
Slight overestimation
Correct estimation
3%
Slight underestimate
3%
How much should the
volume increase in order
to compensate for a
20% price reduction?
Setting discount
levels of promotions based on
intuition is extremely dangerous!!!
Highly underestimated
44%
Do not know
39%
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 * ¡Pregunta realizada con datos de la empresa de cada participante!
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
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Few indicators are measured to monitor the promotional impact
According to the survey, retailers measure mainly the rotation, but in most cases no other sophisticated
indicators are used to measure and control the promotional success.
Monitored indicators
Revenues
Product sales
Total cost of promotion
1
?
Additional in-store traffic
Category impact
2
Product profits
Impact on brand image
Postponement of purchase and
storage
3
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221 Others 4%, * «Usted ….»
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
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1 Total costs of promotion: Share-out between manufacturer and distributor
According to the survey, retailers assume most of the costs of promotion. It also seems that mediumsized retailers negotiate better promotional conditions than big companies.
Promotional costs share-out
Medium retailers
assume lower costs
than big retailers.
Retailer’s
Revenues
in millions €
Monitoring:
% costs
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
Average:
65%
?
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Study «Promotions in the Retail Industry»: Technical file
The survey was conducted through an online questionnaire sent to 4,500 Managers of the Retail and
Consumer Goods industry, receiving 221 valid answers.
?
Universe
Managers and
Pricing Managers of
Retail and
Consumer Goods
Industries
Methodology
Online
questionnaire with
20 questions
Procedure
Mailing to Sartia
and Simon-Kucher
& Partners
contacts
Duration
Sample
size
Field work from
February until
March 2011
Questionnaire sent
to n = 4,500
221 valid answers
€
Sampling
error
3.9% for a
confidence level of
95% (infinite
population)
Source: Sartia/Simon-Kucher & Partners 2011, Study "Promotions in the Retail Sector"; n= 221
© Simon-Kucher & Partners 2011, Competence Center Consumer Goods & Retail, Philip Daus
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Company size and positions of respondents
A total of 53% of the respondents work in companies with over €100 million in revenue, and 80% of
them have high positions in their companies.
Size by revenue (M€)
Positions*
General Manager
Commercial
Marketing
80%
Manager Sales
Purchases
Finance
Pricing Manager
Product Manager
Others
© Simon-Kucher & Partners 2011, Competence Center Bienes de Consumo & Retail, Philip Daus
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Simon-Kucher & Partners tips for promotional management
1. Set a target for each promotion. Business profitability should always be the main target of
promotional activities.
2. Select the type of promotion and promotional product depending on strategic targets.
Thoroughly analyze whether price promotions are the most appropriate, as they are usually less
profitable, or if any other sort of promotions would achieve targets better.
3. Quantify both the total cost and the effect of promotion on revenues before implementing any
promotion.
4. To quantify the total impact on revenues, always measure promotional elasticity, price
thresholds, and most important, cross elasticity. Moreover, measure dynamic effects of
promotions such as postponement of purchase and storage before promotion.
5. Use multiple methodologies and sources to analyze the effects of past promotions, i.e.
historical data or customer surveys. Perform consistent qualitative and quantitative
evaluations of each promotion to ensure a positive ROI and boost the impact of promotions.
© Simon-Kucher & Partners 2011, Competence Center Consumer Goods & Retail, Philip Daus
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