Driving smarter decisions on pricing, promotion

The consumer goods industry thrived for years on its ability to please the average shopper. From toothpaste to soap powder, it knew how to give people what they wanted – and how to sweeten the purchase with the right price, a tempting discount or a great deal. But for the last decade the sector has struggled to grow – both in terms of revenues and margins.

The world has changed, and consumer goods companies have – by and large – found it hard to adapt. Brand loyalty is harder to come by, as more people shop at discounters or go online for the best deals. Digital disruption has opened the market to new companies with different business models. Recent EY research found 45 percent of companies in the industry were struggling to keep pace with changing consumer needs and behaviors.

One way companies can turn the tide is to make better use of the $200 billion they collectively spend each year on trade promotion such as discounts and special offers. While the amount of money involved is vast, investments in trade promotion can, to be polite, seem haphazard. There’s often little or incomplete measurement of whether promotions actually work and minimal accountability for poor performance.

Analytics can shine a light on this area of spending and enable companies to cut waste while driving profitable growth. But only 17 percent of consumer goods companies feel confident in their ability to use analytics to make better decisions on product pricing, placement and promotion, according to our research, and 34 percent say they are ineffective.

Partly, that’s because they lack the experience. Another reason is the lack of accountability mentioned above. If everyone accepts that this is an area of “hit-and-miss” decision-making, where the price you set or the discount you offer is based more on your relationship with the retailer than hard facts, then there’s little incentive to break that pattern and do something different.

But as the sector comes under increasing cost scrutiny, that thinking – where it still exists – can’t hold for much longer. There is great room for improvement. To highlight just how much, we recently studied more than 2,000 promotion events over a two-year period across 14 U.S. retailers and 25 promoted product groups. The events included a range of categories and channels. Our results are summarized in the report, “Can smarter pricing and promotion reduce the emphasis on discounting?”

We found that, overall, companies invested almost 20 percent of their total gross revenue in trade promotion, but nearly seven out of 10 promotions lost money. That is a huge waste of resource. By analyzing such a large number of promotion events across a wide range of scenarios, we identified many practical ways companies can use analytics to make pricing and promotion work harder. Here are five:

1. Set the right everyday price. Consumer goods companies depend heavily on discounts and offers. But in 80 percent of the cases we analyzed, they could have increased volume, revenue or profitability by changing their everyday (or non-promoted) prices. About half of them could boost profitability by taking their prices up, with limited impact on volume or revenue. If they used analytics to better understand their price elasticities at more granular levels – the effect of price changes on demand segments – they could create better pricing strategies and spot opportunities to drive margin, volume and revenue.
2. Use smaller discounts. A big discount sounds attractive, but in almost 40 percent of the cases we analyzed the companies could have made their promotions more profitable by offering smaller discounts. Typically, these companies relied too heavily on deep, temporary price reductions.
3. Run longer promotions. People hate to miss a bargain, so putting a time limit on an offer can drive shopper action. But our analysis found that companies often close their promotions too quickly. Four to five weeks is the ideal length of a promotion, we found. This is where most companies achieve optimal ROI. But the average promotion only runs for around a third of that time (i.e., one to two weeks).
4. Master the details. Due to tight budgets, lack of resources and other reasons, companies often apply general strategies to a product category or channel. That can fail to reflect the way consumer needs and shopping behaviors change; for example, people think and act differently in a convenience store (where they’re shopping for 10 minutes and have to carry whatever they buy) to a megastore (where they’ve come for an hour and have the car outside). Companies can achieve better results if they use analytics to find the best pricing and promotion strategies for each unique product and channel.
5. Help the retailer to succeed. Too often retailers and consumer goods companies see pricing and promotion as a “zero-sum” game – i.e., a win for one side implies a loss for the other. But opportunities for both sides to improve their business performance occur more frequently than conventional thinking would have us believe. Over a third of the promotion events we studied were “win-win” – defined as having positive incremental profit for both manufacturers and retailers. And these events consistently outperformed other events for both manufacturers and retailers.

These five ideas are about fine-tuning the levers of market tactics. We also found that companies in our study struggled to analyze the results of their promotions; two-thirds had not automated the analytical process; most only had the analytic resources to evaluate a few of their biggest promotion events; and many didn’t have the predictive capabilities needed to simulate an outcome and share their thinking with a retail partner.

As we said, there is much room for improvement. And the benefits are enormous. Consumer products companies that can build a clearer, fact-based understanding of what actually drives successful promotion can manage those levers far better. They can then run promotions that strike a better balance between investment and return. They can change the nature of the conversation with retailers. And bottom line, they can achieve profitable growth at an affordable cost.

Disclaimer: The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.