Promotions can stand out without slashing margins

Using segmentation, brand-driven strategy and targeted promotional mechanics means brands can avoid a race to the bottom, even as ever-deepening discounts vie for consumers’ attention.

Holland & Barrett’s promotions aim to persuade consumers to buy products based on benefits rather than price

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As traditional as turkey and as predictable as Auntie Jean falling asleep during the Queen’s speech, at one time the nation would hold tight waiting for the January sales.

But then the sales queues moved to Boxing Day, and then to pre-Christmas. Today, hardly a week goes by without a store window or email declaring 20% off, ‘this week only’. With 85% of adults identifying promotions as an important factor in their purchase decisions, has chasing that pleasing sales spike doomed brands to a constant chipping away of margins?

Heavy discounting

High-street brands have blamed discounting for their woes in recent years, according to a study of various financial reports from 2013 by retail analyst Simon-Kucher & Partners. Clothing brand Levi Strauss blamed a $12m (£7.6m) dip in gross margin on “increase in price promotion and mark-down activity due to a slower holiday season”, while Marks and Spencer blamed “heavy discounting that took place before Christmas” for its 10th consecutive quarter of falling clothing sales.

Yet in 2009, the same study found that Spanish fashion retailer Zara had performed regression analysis from previous clearance sales to determine expected demand for future sales and fixed the prices accordingly, resulting in increased clearance revenues of almost 6%.

“I believe we live in a discount world. In the past, that has had bad connotations, but in the US, for example, it’s just an accepted way of selling products,” says Roderick Taylor, managing director at online retailer Cox and Cox. “The success of Aldi and Lidl has certainly put it into the UK consumer’s consciousness.”

Instead of discounting being a one-way ticket to margin decimation, Taylor believes it is a tool that can be used to revive interest in flagging customer groups and target segments with new products. “We don’t do blanket discounts. We use our data to discover people who have browsed the category and left but haven’t purchased for three months. As a result, we send them a dedicated email,” he says.

“I believe we live in a discount world. In the US, for example, it’s just an accepted way of selling products”

Roderick Taylor, Cox and Cox

The ability to track online behaviour has had a significant effect on brands’ ability to deliver the right promotion at the right time to trigger sales and loyalty. James Backhouse, head of marketing at Evans Cycles, focuses on targeting promotions by channel, browsing behaviour and customer lifecycle.

He says: “If we’re advertising in the cycling press, clearly we’ll be sending out promotions on more expensive bikes. If we’re retargeting people looking at bikes on the internet or clothing, then messaging will come back about offers in these categories. Typically email or direct mail, rather than broadcast media, is most successful for promotions.”

He cites the example of the customer buying a bike in store and some of the available accessories. “We hope customers have everything they need to kit themselves out but not all will buy everything at the same time. We’ll follow up with communications and customer-related offers such as bike check-ups. If the customer still hasn’t purchased after a certain time, we’ll send a follow-up offer.”

Evans-Cycles_WEB
Tracking online behaviour enables Evans Cycles to deliver the right promotions at the right time

Customer data

Segmentation is possible for Evans because, although minimal data is collected at point of sale (usually email), within the customer care element of its offering – bike check-ups and servicing – the customer is usually willing to provide details.

White goods can sometimes have more difficulty delivering an ongoing relationship based on customer data, particularly if customers fail to return the free warranty registration forms or provide information at point of sale. Appliance retailer AO.com’s promotions are mainly based on the cashback model, providing both it and the product manufacturer with access to more data.

“Brand-led and AO.com cashback deals are probably our most successful promotion,” says retail director, John Coulter. “We’re not the only retailer to do this but we probably have a better [customer] journey than most, which encourages our customers to claim back their cash.”

Making the journey to claim the cash easily is vital, because although it seems counter-intuitive to encourage customers to take money away from the company, the data that can extend the relationship is potentially more valuable than maximising profit margins at every transaction. Coulter admits, however, that the company is only at the start of the journey.

“We have only been undertaking segment-specific promotions for a few months and while they have proved successful, we are still in the process of analysing the learnings.”

While promotions seem to be alarmingly frequent, with many lasting only two or three days, Cox and Cox’ s Taylor believes that promotional activity needs to be embedded in the organisation over long periods to derive a result.

“I’m a believer in letting things run for a period before calling the result. We want to make sure our browsing emails [promotional communications based on site browsing behaviour] work. We’re currently around week eight of a campaign but we will not look at the results until mid-January next year.”

It is clear that consumers are delighted to be able to use promotions to reduce their costs but they are certainly not surprised. According to a study from coupon company RetailMeNot, customers say three-quarters of their in-store promotions and two-thirds of online offers are for use on planned future purchases.

Delaying purchases

However, with consumers wise to companies’ likelihood to discount, are brands’ margins at risk from those delaying purchases until the expected money-off email arrives? The executives interviewed for this article say they expect this kind of ‘gaming’ of the promotions schedule, but Backhouse adds: “In an ideal world, you would like customers to get only the offer they need but I would prefer if they bought from us, even if they are waiting for a discount.”

Targeting promotions can also be done on a more macro level. Backhouse notes how important it is to manage the varying benefits of a multi-tiered promotional strategy. For Evans Cycles, there are two key calendar events that trigger promotional activity: January sales and spring trade-in. Rather than treating promotions as a necessary evil, he believes it has become a distinguishing part of the brand.

“We have a range of customer segments who all behave differently in each promotion”

Kyle Rowe, Holland & Barrett

“We want to become known for some of our promotions. We have been doing the trade-in for three years now and this year is the first time it has been nationwide,” he says.

Holland & Barrett’s promotions are used as the hook for major TV campaigns, as well as in-store and online communications. Perhaps best known is its ‘Buy one, get one for 1p’ offer, which group trading director Kyle Rowe notes is the primary strategy for encouraging less frequent shoppers back in store.

“Looking through our loyalty data, we have a range of customer segments who all behave differently in each promotion. It’s a layering effect with our total sales made up of discounted products, other promotions and loyalty. Our mission is to drive people through the loyalty scheme. We are using all our tools and technology to mix with the loyalty data to inform the level of targeted discounts, as well as using market research around the brand pillars.”

This promotional strategy works in concert with a new site and loyalty programme, Rowe says, adding that in the next 12 months Holland & Barrett will be able to target the customer with personalised offers across web, email and at the till.

“Our customers come in on a mission and are rarely distracted from it. Our challenge is to deliver promotions that are around benefits rather than price,” he concludes.

Backhouse at Evans Cycles also notes that it is important the company does not hold back with its promotions: “The reason customers shop with us is because we have the best range of bikes and a depth of stock. When it comes to sale time, we need to make sure that all the bike brands we are known for are on sale.”

He adds: “We’re not doing anything different but we’re making sure what we do, we do well. If we had great ranges all year round and only reduced two of them during promotions, we wouldn’t be any better than the competition.”

AO.com’s Coulter agrees that the customer does not appreciate brands holding back on promotions. “Our range and overall delivery proposition can be a differentiating factor. There aren’t many other retailers that can offer the same breadth of range, to always have the product in stock and deliver it the same day.”

Even though it is the time of year when all the world seems to be discounting, and that the only way to stand out is to discount even deeper, plenty of brands have developed their own particular niche in targeting promotions. It is not only tactical but strategic, and, if done consistently well, can contribute to the strength of the brand.

How Holland & Barrett targets promotions

  • Buy one, get one for 1p – acquisition

This promotion targets customers who shop infrequently and come to the shop to stock up on the limited 1p range. The focus is on specific customer segments, and range choice depends on the products most likely to bring them in.

  • Buy one, get one half price – refreshing valuable customers

This encourages in the most loyal customers because they can acquire products that are rarely discounted. There is no profit margin when discounting chilled and frozen products, however data suggests customers shopping in this part of the store have a higher propensity for loyalty.

  • Half-price sale both new and existing customers

Simply put, the half-price sale delivers best value for money to the customer.

  • Product-specific restoring a category to growth

The vitamin supplement market had been in decline as a whole, so Holland & Barrett introduced an offer to buy from any product category and try one of three basic vitamins for free. This has allowed new customers to enter the category and Holland & Barrett to grow the consumer base for vitamins.

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