Contact

The Hidden Cost 

IMAGES BUSINESS OF FASHION, September 2010

Nalini Singh

A sales promotion or “sale” works as a branding tool. It is an effective way to stimulate demand. But to perform better and stay ahead in the competition, retailers need to understand the cause and effect relationship of sales promotion.

Given the growing importance of sales promotion, there has been considerable interest in its effect on different dimensions, such as the consumers’ price perceptions, brand choice, brand switching behaviour, evaluation of brand equity, effect on brand perception and so on. The concept of sales promotion in India is as popular as in any other Western country. But unlike the West, the number of retailers factoring the expenses of sales promotion is negligible.

In a country like India, sales promotion takes place at least four times a year. The approach and the strategies of an Indian retailer are different compared to the West. An average Indian retailer is only interested in the sales figures. Few look at the footfalls, conversion, average bill size, etc. during promotions. And even fewer measure profits by relating revenues to costs of promotions. Isolating the effect of different promotions in a situation of promotion overlap is not even considered.

So, we come to the question: Do Indian retailers by and large ignore or underplay the cost of promotion while assessing the success of a sale campaign? “It is a debatable issue. We at our level try to be judicious with our expense budget and the sale forecast. We never underplay promotion activities but ensure that there is no overdoing,” says Sanjay Arora, Marketing Manager, Chunmun.

Strategies affecting sales promotion
Today, we find marketers making use of the smallest of excuses to launch a promotional campaign. Father’s day, Mother’s Day, Women’s Day, you even have a Grandfather’s Day and Grandmother’s Day – name it and there’s a day to celebrate. These are largely gimmicks to attract footfalls and, if figures are to be believed, pretty much mimic a global phenomenon. “We are in the process of converting big days into properties and recently have done a few like Father’s day, Women’s Day and Mother’s Day, to name a few,” says Samir Sahni, Director, Ritu Wears.

The primary objective of a sales promotion is to bolster sales by predicting and modifying the purchasing behaviour and pattern of target customers. Not only that, it also attracts new customers while retaining the existing ones. With so much cut-throat competition, no retailer wants to lag behind in capitalising every emotion and sentiment of the consumer. Once one big retailer starts, it becomes a trend.

Today, the Indian consumer has more disposable income and is more inclined towards the higher-end brands. They wait for the time when brands offer the best discounts. Last year, retailers preponed festival sales or ran them for extended periods to be able to clear the inventory. Many brands went on sale before the usual last week of July. Moreover, stores are still stocking more discounted items than fresh merchandise.

A pertinent question here would be that apart from the “end of season sale”, do other campaigns employ the “push and pull strategy” during the year. “Yes, they do but not to a great extent because footfall during these periods are not as high,” says Arora at Chunmun.

Interestingly, Independence Day Week is becoming another popular significant event arousing interest among retailers in India. Almost all retail chains – big or small – have come up with special deals and drawn up ambitious sales figures for this event. However, these could be strong indications of modern retail in India. Indian retailers have successfully created newer shopping seasons to drive consumption by providing special deals.

This trend garnered 10-15 per cent incremental growth in sales. According to industry circles, an apparel store, during any big promotions, can easily achieve sales of Rs.50-60 lakh a day.

Growth through “end-of-season sale”
“Generally, as per collection, sales increase more than two-folds,” says Arora. On an average, a brand doubles its sales through the end-of-season sales. Samir Sahni at Ritu Wears explains, “The brand easily achieves 70 per cent of the top-line growth through this particular promotional mix.”

Studying the Indian retail market, we find that an average company in the country focuses more on top-line growth and decides the success of the brand based on the net sales which according to them automatically improves profitability. Typically, when a retailer plans an expensive promotion, he needs to hire extra staff and increases ad spends. On the face of it, profits are high, but actually short term. Competitors are bound to come out with better offers, better products and better features, and the whole effect will be neutralised. The hype may lead to more customers trying their product and services. In the process of attracting more customers, the retailers forget that these are fair-weather customers and are attracted only by the discounted rates. Meanwhile, when the customers find that the offerings are of much value they exit.

“Most of the time a promotion that offers a great price advantage to the consumer is seen as successful as it allows retailers to get rid of old stock. However, the cannibalisation of sales of other dull-price merchandise is not taken into account. Hence, it is not merely about what happened due to the promotion, it is also about what didn’t happen as a result of the promotion,” points Sahni at Wazir Advisors.

Cannabilisation of the product
Cannabilisation of the product could be one of the major drawbacks due to heavy sales promotion, but most of the brands try different strategies to avoid it as much as possible. “Since the promotions we run always have time tag lines, there is no question of cannabilisation,” says Samir Sahni, Ritu Wears.

“While there is a possibility that promotion of one category could cannibalise other categories within a store, a successful promotion would ensure higher footfalls and overall higher demand, to offset any potential cannibalisation,” says Devangshu Dutta, CEO, Third Eyesight.

Sales promotions effects are short term, unlike other integrated marketing communication tools, and also the strategies do not have everlasting impact on the brand. Increases in sales often last only during the period of promotions. After that no consumer loyalty is noticed because the majority of consumers in an aggressive promotion have tried the brand already. Sales promotion also leads to high price sensitivity; consumers try their level best to purchase the item during the time of sales only. This leads to reduction in the profit margin of the brand. Sales promotion is a calculated risk, but one that needs to be planned and handled carefully to be truly effective.

Business owners should recognise that sales gains from promotional campaigns often falter after an initial spurt. One may sacrifice the long-term brand equity for achieving short-term goals but that is a myopic way of conducting business. Moreover, too many discounts will dilute the image of exclusivity.

Having said that, it is also true that sales promotion could be a good opportunity to create a strong and loyal client base. Retailers can target a new segment in the market by focusing on demography and psychographics of users such as users with high and low purchasing needs.

Promotional overlapping
Promotional overlapping is another factor which could spring up due to two or more promotions taking place at the same time. This leads to confusion and delivery of fuzzy messages to consumers.

Some brands do successfully manage two promotional campaigns simultaneously. A recent example is Levi’s, who are currently managing their “end-of-season sale” with a “change your world” campaign in order to celebrate 15 years in India.

“How can one manage promotional overlaps?” Arora asks. “As a retailer we always ensure that there is no overlapping. If we have net price counters they don’t merge with the routine discount offer.”

Cost of a month-long campaign
“The cost for a store chain like us is in the range of Rs.60 lakh to Rs.85 lakh in terms of activities. We spend 70-80 per cent on public address media (i.e., newspapers, hoarding and FM radio etc.) and the rest is for in-house activities,” Arora reveals.

Typically, a brand spends 70 per cent of the total expense on above the line expenditure (ATL), with the balance being assigned for below the line expenditure (BTL). The reason could be that publicity vehicles such as media, radio or hoardings build up the top of mind awareness (TOMA) very well.

“We spend around Rs.70 lakh, wherein ATL is Rs.45 lakh and BTL is Rs.25 lakh,” says Samir Sahni at Ritu Wears.

The brands use ATL because they think this strategy works for brand recall. On the other hand, the brand incorporating BTL will provide hard numbers in terms of revenue increase.

Case Study: A Successful Promotion Partnership
On 19 August, “Groupon” the site known for its local daily deals often offered by small businesses including restaurants, gyms and spas in partnership with the fashion brand Gap launched the deal to offer $50 worth of apparel and accessories at a lowly price of $25. With a $1 billion valuation and more than 9.4 million Groupons sold since its launch, it has become one of the most recognised group-buying sites on the web. By the end of the first day of their launch, 441,000 Groupons were sold, bringing in more than $11 million. Groupon usually splits the revenue with partners, but declined to disclose its share. The discount on Gap items caused visits to Groupon.com to increase by 37 per cent on the day of their launch and 51 per cent after a week. Interested purchasers were also visiting Gap.com immediately after Groupon.com, and the share of downstream traffic from Groupon.com to Gap.com jumped to 4.18 per cent on the first day of there launch itself. This figure is strong from a customer acquisition standpoint because 53 per cent of the visitors referred from Groupon.com to Gap.com were new, meaning they had not visited the website in the past 30 days. Also aiding in the success of the promotions was high consumer awareness and shoppers actively seeking the discount. Searches for “Gap coupons” ranked 4th on the first day among the search terms driving traffic to Groupon.com. The discount was also being promoted via Twitter’s Earlybird Offers account.

Means of internal assessment
“Through the assessment of top-line incremental numbers, we define the success of sales promotion,” says Sahni at Ritu Wears. This is the major swing among retailers. Most of the Indian retailers judge the success of any sales promotion through the top-line growth they have made. Sometimes a retailer forgets the other main objectives of the sales promotion, in the rush to concentrate on only net sales made.

Now, the question is, apart from net sales, what all can be achieved through a sales promotion? Most retailers complain that customers only get attracted towards their brand because of the discount coupons or other promotional offers, and once they get it, they keep looking for it. This impacts the business negatively. The solution to this is (as we’ve said earlier) to concentrate on parameters other than just net sales.

Sales promotions must move the product. This usually means more sales, but not always. For example, if you run a scheme in which you are giving one product free with another, you may draw more products out of the pipeline, but overall profitability may nosedive. Also, increased product movement can generate deduction of sales after the promotional period. This is something retailers need to anticipate.

Finally, the question is how to assess the efficacy of sales promotion. The most common method is to examine the sales data before, during and after a promotion. Suppose a company has 10 per cent market share before the period of promotion, which goes up to 14 per cent during the promotion, falls to 9 per cent immediately after the promotion, and rises to 12 per cent in the post promotion period. It shows that the promotion has attracted new customers and also activated more purchasing by the existing customers of that particular brand. After the promotion, sales fell as consumers worked down their inventories. The long-run rise to 12 per cent indicates that the company gained some new customers.

“We have come across businesses where the sales and merchandising teams are incentivised purely on sales achieved. This only results in shelfstuffing, aggressive advertising and discounts. While top-line targets are achieved, the business is not really healthier at the end of the exercise. In Third Eyesight’s view ‘return on investment’ is a good method to apply to promotions, where ‘return’ is the net margin, and investment includes all promotional expenses. Good businesses with mature and transparent processes would evaluate the success of any promotion on the basis of margins retained by the business after all expenses of running the promotion have been accounted for. Costs of each promotion can easily be monitored separately, as can the sales achieved of the products being promoted. In more sophisticated data-driven organisations, analytics can play an enormous role in planning promotions and in tracking their success,” says Devangshu Dutta.

If the company’s product is not superior, the brand’s share is likely to return to its pre-promotion level. The sales promotion can only change the time pattern of requirement rather than the total demand. The promotion may have covered its cost but more likely did not. One study of more than 1,000 promotions concluded that only 16 per cent of the total expenses get paid off.

Holistically viewed, we can see that despite the cons, sales promotion will continue to play a growing role in the promotion mix and will continue to be one of the most important tools. To make it more effective, retailers need to define the sales promotion objectives, selection of appropriate tools and proper construction of sales promotion programmes. Every paisa spent should be accounted for. Only then will Indian retailers spot the cause and effect relationship of sales promotion.

Share