Fine Tuning Promotional Learning

In today's difficult economy, price and promotion play a critically more important role in consumers' purchase behavior and product choices. The challenge for manufacturers is to develop plans for category and brand spending that grow volume and earnings while supporting brand equity and a promoted price position.

How is this done? The first step requires a clear understanding of what causes consumers to switch brands and the importance of deal and promoted price relative to those switching decisions. Otherwise, all of the available dollars will be sucked out of marketing and targeted toward competing with retailers' private label price points or other low-price national brands.

Understanding where the consumer fits in the equation focuses the outcome toward achieving the right competitive promoted price points and creates promotional bundling strategies to improve the return per trade dollar spent. This means that brand equity can be supported because advertising dollars do not have to be reallocated to trade spending. Net, the business is able to achieve the whole package – grow profits while supporting brand equity and establishing a competitive promoted price position.

Many manufacturers are managing a portfolio of brands across a category based on historically promoted price points and product groupings. Consequently, more information is needed to make insightful promotional decisions. In many cases, the manufacturers feel like they have a good handle on the promotional lifts generated when that product group is promoted. That usually gives them a warm feeling about return on investment per trade dollar expended. What they don't usually have is insight into the impact promoted group promotions have to the rest of their portfolio. In effect, they do not know the impact of the promotion net of cannibalization to the rest of their portfolio.

To understand this Net Brand Effect (NBE), manufacturers need to understand the consumer switching behavior that takes place when that particular promoted group is merchandised. Say chicken noodle soup in a can is promoted at two for three dollars. How much of the promoted volume is sourced from microwaveable soup and other varieties in the total portfolio? What is the net brand impact of running this promotion? Once you start to drill down into those questions, manufacturers can then begin to explore the Return on Investment (ROI) of different bundles of promoted products. This enables them to determine which groups collectively provide the highest amount of retained incremental volume or best ROI when promoting.

To do a NBE analysis across the portfolio, two things are needed:

• A detailed market structure that defines the key consumer segments and deciphers the consumer switching that occurs at each distinct level of the structure
• Modeled promotional response data to understand the impact of promotional and base price changes.

At HRCP, we began providing this promotion portfolio learning on a consulting basis along with a comprehensive trade strategy. Today we have developed the structure switching into a set of tools that can be used to define optimal promoted bundles to maximize the return on trade investment for both manufacturers and retailers. These tools will also define optimal price points and frequency as many tools do. What sets it apart, however, is the ability to understand the true return on investment net of cannibalization.

What we have found for many of our clients is that the size that may have the greatest promotional lift may in fact be very cannibalistic of a more profitable promoted group within the portfolio. The net effect of that promotion could be significantly diminished when combined with the impact to that more profitable group. Also, by bundling products in promotions that touch different consumer segments of the market structure, the promotions tend to be more highly incremental than stand-alone promotions. An example of this would be that promoting a microwaveable soup and can soup in the same ad would appeal to a broader set of consumer needs and create higher promotional incrementality.

We have used this tool across many over-the-counter (OTC) drug and food categories and have found many areas where promotional synergies can be achieved by better, more efficient bundling at more moderate price points. We have helped our clients have defined ways to reduce overall trade spending while retaining the necessary incremental volume to maintain or grow share of market. For the retailer, it is also important to understand the category effects these new promoted bundles provide so they can evaluate not only the profitability, but the net category effect of what is being recommended. The tool we developed also uses the same consumer switching to aggregate up to total category impact of different promotional events.

The bottom line: In tough times, it is more important than ever to focus on consumer understanding and shopping behavior to maximize pricing and promotional decisions for volume and profit growth.