Trade Promotion Optimization for Retailers

The latest in retailer loyalty programs is here. Chains like Starbucks and Gap are increasingly tracking and rewarding customers who show up at their locations and check in via smartphone apps and social networking sites. Customers are offered real-time promotions on the spot based on their shopping habits and loyalty to the stores and/or brands. In theory, these kinds of retail promotions allow everyone to win; in reality, there is another story.

In order to support these kinds of loyalty programs and achieve their long term corporate goals, retailers must continuously plan their promotional activities. While most companies plan for a year or a quarter forward, some revisit their plans monthly or weekly, depending on market fluctuations or business circumstances (e.g., ever-changing transportation costs, actual sales data); and whether they’re trying to come up with a strategy or tactics on a corporate or a field level, the same old questions arise – how do we know which promotions to run given the spend budgets, costs, business constraints, and any other conditions that must be satisfied? What combination of trade events would yield maximum profit, volumes, or sales? How do we ensure that minimum margin targets are still being met? How does an EDLP (Every Day Low Pricing) strategy fit in?

In day to day tactical planning and on-the-spot marketing, answering these questions becomes much more difficult because of the additional information that must be evaluated (e.g., stock on hand, individual shopping histories, and products current lift factors). In more cases than not, stores will not have optimal plans if they base decisions on hunches or use “last like” promotions. Executing non-optimal plans over all brands, departments, and regions can potentially mean huge losses for an organization as a whole.

In order to understand their promotion plans better, retailers require Trade Promotion Optimization (TPO) solutions that can create mathematically optimal sets of promotions. Users, via an easy to use graphic interface, should be able to specify trade budgets and what-if trade events and their parameters, such as costs and discounts. No user should have to write code or specify any formulas to run analyses on promotions. Furthermore, a TPO solution should be able to deliver answers that meet the criteria a user has defined (e.g., solve for a maximum Profit). Additionally, TPO systems should seamlessly integrate with existing Trade Promotion Management (TPM) systems, as well as access third party predictive lift data. A TPO system must definitely allow for post promotional analysis and correction.

For retailers seeking a TPO solution, there are key questions they should be asking vendors:

1. How does the TPO solution come up with an optimal solution in terms of profits and/or sales revenue?

Some solutions provide only simulation capabilities with every constraint being locked down. As a result, the user might end up manually running hundreds or more scenarios, never stumbling upon an optimal set of events and choosing the best of scenarios to run. True optimization solutions allow for many degrees of freedom (e.g., unlocked frequencies for the events or unconstrained calendars with support for seasonality). In contrast with simulation, an optimization engine can run millions of analyses until it comes up with mathematically optimal frequencies and suggests weeks on which to run events.

2. Can the TPO solution help with brand / SKU event rationalization?

In a true optimization solution, SKU dimension is just another degree of freedom. The system should be able to decide which brands to promote and which not to.

3. Can the TPO solution help us better understand retailer impact vs. manufacturer impact?

Best in class TPO solutions should be able to quantifiably show the impact of executing specific promotion plans on retailer’s vs. the manufacturers’ bottom lines. This feature allows retailers to come up with promotions that are a win-win for both parties.

4. How does the TPO solution integrate with existing TPM systems and analytics providers like IRI or Nielsen?

If the organization has a subscription to these or similar information providers, the TPO system should be able to easily consume lift data for the events considered.

5. How does the TPO solution enable for post-promotional performance analysis and plan correction?

Not only is it critical to have optimal promotion plans in place, it is equally important to track on their execution. Retailers must be able to feed the actual sales data back into the TPO system and do a back solve to tweak the plans, if necessary.

The right Trade Promotion Optimization solution accurately captures existing business constraints and conditions and provides optimal promotion plans; thus, allowing better management of trade spend, making it possible for a retailer to develop innovative promotions to achieve a new level of financial success.

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