Are your promotions hurting your business?
Discounts and promotions can be a really effective way to drive sales and hook new customers. But if you go use them without thorough planning and analysis, it’s possible your business is losing money.
How do you measure the value that your promotions are driving?
While strategic promotion activity can be essential for online brands, are you truly driving real growth or simply bleeding profit?
The biggest brands in the world have entire teams of data scientists and consultants focused on pricing analysis and optimization. Small and mid-size direct-to-consumer brands usually don’t have the time or resources to perform a true evaluation of how well promotions are achieving their goals.
Below, we’ll explore four measurement methods that can drive real value for your future promotions and help prevent you accidentally leaking a large amount of margin.
Let’s start with a typical wish list for a perfectly executed promotion:
- Sales increase: Stating the obvious, you sell more on promotion than is typical.
- Minimal cannibalization: The promotion drives true incremental sales. The sales spike that you achieve is driven by (1) new customers and (2) customers who bought what they otherwise would not have.
- The halo effect: While shopping, your customers purchase additional items that are not explicitly promoted.
- Customer lifetime value: Your new customers are repeat purchasers, and drive long-term value.
This list becomes the framework for our analysis. The analysis gets much more complex as we move down that list, but even if you only make it through one or two you can have big jumps in profitability.
Increase sales with promotions and offers
Let’s jump in and start with sales increase. While this goal may be obvious, measuring it accurately is not always straightforward. It can be tempting to simply add up all of your sales that redeemed a promotion, but this method would capture customers who would have bought anyway and simply used your promotion because it was available.
1. Pick a benchmark
To begin, we need to choose a suitable benchmark time period to compare against. This time period should reflect your organic sales cycles. If you’re a seasonal brand, it can be difficult to choose the right benchmark, but a promotion in-season should be compared against an in-season benchmark, and likewise for out of season. If the promotion is during a week that is always promoted (e.g., Black Friday), benchmarking can be even more challenging.. There are still strategies for isolating an appropriate benchmark in these cases, covered at the end of this article.
2. Compare sales period over period
Once you have your benchmark, compare sales for the time period that was on-promotion, and take the sales difference.
3. Figure out profitability
We do this by understanding two major cost components. The first is how much you paid to execute the promotion, and the second is how much of a discount you gave to your customers. Take your total margin from your benchmark periodSubtract it from your total margin in your promotion periodThen subtract your costs of executing the promotion. This is the simplest of the ROI calculations, but can provide real insight into how much your growth is costing.
Minimize sales cannibalization
Now turn to the next goal of minimizing cannibalization. We touched on cannibalization when we calculated our basic incremental sales, but there is a further aspect that we can layer on.
Our incremental sales approach looked at what happened during the promotion period. But we also need to evaluate what happened in the weeks before and after. Sometimes called pull-forward impact, you may notice that your sales after a promotion have dipped below your benchmark sales. This is because customers who would have purchased that week, were already enticed by your promotion earlier.
Similarly, we also need to evaluate the weeks before the promotion, or the pull-back effect. This is typically observed when your brand is on promotion at a predictable time of the year, because your customers know that there is a promotion upcoming.
We can compare both of these time period impacts against our benchmark time period, and subtract any pull-forward and pull-back profit loss from our ROI calculation.
Understand the Halo Effect
Your promotion may be geared across multiple products or your brand generally, in which case you will want to directly measure those impacts as outlined above.
However, if your promotion does not cover your entire line of products, you will want to make sure you are capturing any incremental sales impact that occurs outside of explicitly promoted products.
Take a look at checked out orders that redeemed the promotion and the other product lines that are included in those baskets. You will want to run an incremental sales analysis on any of those products. Then add in that impact to your ROI calculation.
Analyzing customer lifetime value
Moving away from the short term value impacts, we turn to customer lifetime value.
If your brand has a calculation that it uses for customer lifetime value, it can be tempting to apply that number to the new customers that your promotion attracts. But do promotion-acquired customers have the same long-term behavior as organically obtained customers?
You will need to take a look at the new customers that you have acquired in the past on promotion, ideally on a promotion with a similar structure.
If this is the first promotion of its kind, make sure to track this group of customers going forward! How do these customers compare to your organic new customers? How many repeat purchases does each group make within 3 months, 6 months, one year? What is the sales and margin value of those repeat purchases?
These comparisons will help you understand if your promotion-acquired customers are as valuable long term as other customers. This is highly beneficial to understand; if customers that are attracted by promotion don’t become long-term brand converts, the promotion investment will yield only the short term measured results above.
A customer base deep dive uncovers all this, and more, and is a key tool to unlock opportunities to radically grow customer lifetime value and total revenue.
Conclusions and next steps
Though promotion measurement can quickly become complicated and time consuming, but you can get a good baseline by working through the framework above. As your team grows, and you get more time and resources to devote to measurement, you can continue to layer on and refine the accuracy of your promotions. With consistent measurement and learnings, your brand will unlock new opportunities. Which of your products attract the most incremental sales? Are you more likely to see a halo impact if you promote your flagships or auxiliary products? Which first-time product purchase is most likely to yield a long-term brand loyal customer? These questions will be critical for generating profitable, long-term growth. And it starts with understanding how well your current promotion efforts are working.
Bonus: Analyzing Black Friday promotions:
Determining a highly-seasonal benchmark (e.g., Black Friday): The best way to do this is by selecting a specific holdout market that will not receive a promotion offer. Compare the uplift that this market sees in its sales during the promotion period to the markets that are offered the promotion. For example, if the non-promoted market sees a 10% uplift and the promoted market sees 15%, you can use 10% as the baseline increase that would naturally occur during the seasonal week.
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