Can smarter pricing and promotion reduce the emphasis on discounting?

How to make price and promotion work harder

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Consumer products (CP) companies spend vast amounts of money on trade promotion. If they could direct this spend better, they would achieve a more profitable mix of promotion and pricing, without sacrificing revenue.

EY - Can smarter pricing and promotion reduce the emphasis on discounting?

The most effective strategies tend to be those that consider pricing and promotion together — these are not separate challenges. And, success is more likely when manufacturers and retailers work in partnership.

To highlight the scope for companies to design and implement much more effective promotion strategies, we studied over 2,000 promotion events across more than 14 US retailers and 25 promoted product groups (PPGs). The events included a range of categories and channels.

We found that close to 20% of revenue was invested in trade promotion, but on average, these events lost money.

By breaking down such a large number of promotion events, across a wide range of scenarios, we identified five ways to make pricing and promotion work harder.

Companies that use the insights from our study to retune their pricing and promotion strategies could significantly increase their return on investment (ROI), to drive profitable growth at an affordable cost.

Our research suggests the benefits could include:

  • Volume up 1% to 4%
  • Sales revenue up 8% to 10%
  • Gross profit up 8% to 12% (net of trade spend)
 

Five steps to improved pricing and promotion

Click each step for more information

  • Optimize everyday prices

    Standard discounts and general promotions seldom work. In fact, nearly 70 percent of such promotions lose money.

     

    EY - Can smarter pricing and promotion reduce the emphasis on discounting?

    Adjusting everyday pricing will improve performance

    EY - Adjusting everyday pricing will improve performance

    A data-informed view of price elasticity — the effect of price changes on demand — results in better pricing strategies. Companies are better able to spot opportunities to drive margin, volume and revenue. They can also clarify whether it’s better to go with an “everyday low price” strategy, or to take a more standard “hi-lo” route, where a product is offered at a high price and then heavily discounted.

  • Use smaller discounts — only go deep for feature or display

    Nearly, 40% of the PPG and retailer combinations we analyzed could make their promotion events more profitable by offering smaller discounts, as heavily discounted events largely lead to negative ROIs.

    EY - Use smaller discounts — only go deep for feature or display

    CP manufacturers often use temporary price reductions in isolation, even though promotions do not succeed by price alone. These events are more likely to increase revenue and profit when they are combined with merchandizing, such as in-store, visual shelf or aisle PPG promotions.

    If there’s no merchandising, discount levels of 20% or below deliver better results. So, manufacturers should only use deep discounting as a bargaining chip to gain access to merchandizing.

  • Rethink duration, timing, shopper marketing and co-promotions

    Promotions can be much more effective when companies use data insights to optimize the core elements of their offer.

    EY - Rethink duration, timing, shopper marketing and co-promotions

    Most promotions are too short: Four to five weeks is the duration that gives most companies optimal ROI — the average promotion only runs for around a third of that time.

    Timing makes a big difference: If a PPG is not heavily seasonal, promotions outside of core holidays are often more effective as they avoid competition with seasonal products on promotion.

    Question shopper marketing: Shopper marketing promotions cost more and result in significantly lower ROI, but they do generate higher revenue.

    Single-product promotions can beat co-promotions: Companies that combined multiple PPGs in one co-promotion risk cannibalizing their own sales. In some cases, companies could have increased revenues by 30% and profits by 33% if they had run separate promotions on each product.

  • Create promotion strategies at the retailer and PPG level

    Manufacturers can improve performance across categories and channels by sharpening the focus of their promotion tactics at a granular level.

    Both manufacturers and retailers will find it harder to meet their financial goals if they use high-level promotional strategies that are not tailored to influence the consumers’ purchase decisions. Not all retailers in a channel are alike – they require different strategies and tactics.

    EY - Create promotion strategies at the retailer and PPG level
     
  • Build profits for both the retailer and the manufacturer

    Manufacturers need to build more collaborative relationships with retailers. Too often they see pricing and promotion as a zero-sum game, where a win for one side implies a loss for the other.

    There are untapped opportunities for both sides to improve their business performance. Over a third of promotion events were “win-win” – defined as having positive incremental profit for both manufacturers and retailers.

    EY - Build profits for both the retailer and the manufacturer

Getting to the prize

Companies can use data analysis to dismantle and understand the performance of their promotion events and to model future events. The results will help them to fine-tune their future strategies with laser precision.

Key steps include:

Set clear priorities: Effective pricing and promotion strategies target the right balance between volume and profit. There’s usually a trade-off between the two.

Embrace analytics: Decision-makers need access to powerful, relevant data analytics. Move beyond piloting tools and embed analytics into the fabric of the business.

Work together: Create a collaborative mindset where people work together, both across internal functions and with retail or manufacturer partners.

Build capabilities: Find the right balance between short-term actions that lead to better pricing and promotion strategies, while building the capabilities that will sustain long-term success.

 

We conducted this research with the help of two leading US price and promotion organizations – Sequoya Analytics and the Promotion Optimization Institute. We’d like to thank them both and also thank the companies that shared their data, time and energy. This research wouldn’t have been possible without them.