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Why Retail Promotions Fail: Confusing a Promo Problem with a Markdown Problem

By Fabrizio Fantini • 23 May 2024

Imagine walking into your favorite store, eagerly anticipating a ‘big sale,’ only to find that it has turned into a ‘final markdown’ clearance. As a customer, you might score some great deals, but as a retailer, this signals a missed opportunity and a hit to the bottom line. This is the tale of many retailers who confuse a promo problem with a markdown problem, and it’s costing them more than just profits.

Over the last few weeks, we have been examining the problems retailers face with retail promotions. In the first installment of this series, we discussed the diminishing returns of discounting in a promo-saturated market. The second blog examined how misaligned pricing and discounting strategies can lead to promotional failures. In this post, we will explore how retailers often struggle to differentiate between markdown problems and promo problems, leading to suboptimal strategies and margin erosion. This issue is rooted in a misunderstanding of the distinct roles and impacts of markdowns and promotions on sales and profitability.

Markdowns vs. Promotions

Waste, Overstock, and High Sales to Inventory Ratios

Markdowns are permanent price reductions typically used to clear out unsold inventory. They often result in substantial margin losses as the discounts are deeper and more prolonged. For example, a fashion retailer might mark down a summer collection at the end of the season by 50-70% to clear out unsold stock, significantly impacting profitability.

Retail promotions, on the other hand, are used in-season. They are temporary price reductions or special offers designed to boost sales within a specific period. Promotions, when executed effectively, can drive immediate sales without the long-term margin impact of markdowns. For instance, a grocery store might run a “buy one, get one free” promotion on a popular item for a week, boosting sales and clearing inventory quickly without permanently reducing the price.

Over-Reliance on Markdowns

Many retailers rely heavily on markdowns, perceiving them as the primary tool to address slow-moving inventory. This reliance often stems from the misconception that the issue lies with the product’s inherent appeal or pricing rather than the promotional strategy. However, markdowns, being permanent, signify a larger margin giveaway, significantly impacting profitability.

However, constant markdowns can condition customers to anticipate sales, leading them to defer purchases until prices drop. This waiting game can be detrimental to a retailer’s brand value in several ways, including eroding the perceived value of products, reduced customer loyalty as buyers look for deeper discounts, and shrinking profit margins.

By leaning excessively on markdowns, retailers miss out on the opportunity to utilize strategic retail promotions to drive sales during the season. Instead of resorting to markdowns, promotions can be tailored to target specific customer segments, create urgency and maintain the perceived value of the product. This approach not only preserves the brand’s integrity but also encourages healthier buying patterns among consumers.

Identifying a Promo Problem

A promo problem typically occurs when retailers fail to engage customers effectively during the season, leading to a buildup of unsold inventory that eventually necessitates markdowns.

This can happen due to several reasons:

Inadequate Promo Planning: Without a well-thought-out promotional calendar, retailers might miss key selling opportunities, resulting in unsold stock.
Ineffective Promo Execution: Poorly designed promotions that fail to resonate with the target audience or are not compelling enough to drive sales.
Misalignment with Customer Expectations: Promotions that do not align with customer needs and preferences, leading to a lack of interest and engagement.

Common Pitfalls in Retail Promotions

Retailers often encounter several pitfalls that can lead to ineffective retail promotions:

Unclear Promotion Goals and Strategy: Launching promotions without clear objectives or a coherent strategy can lead to promotions that don’t effectively drive sales or build brand value.
Overcomplicating the Loyalty Program: Making a loyalty program too complex for customers to understand or participate in can discourage engagement and reduce the effectiveness of the promotion.
Offering Irrelevant or Insignificant Rewards: Rewards that do not add significant value to the customer can lead to disinterest and may even devalue the perceived worth of the brand.
Focusing Only on Transaction-Based Rewards: Relying solely on transactional incentives can fail to build long-term customer loyalty and engagement.
Poor Promotion of the Loyalty Program: If customers are not aware of the loyalty program or its benefits, they cannot participate, leading to a failed promotion.

By avoiding these pitfalls, retailers can create more effective promotions that engage customers, drive sales and maintain profitability.

Strategic Use of Promotions

To address promo problems and reduce the dependency on markdowns, retailers should focus on crafting more effective in-season promotions.

Here are some strategies:

Data-Driven Insights: Utilize customer data and analytics to understand purchasing behavior and preferences. This helps in designing targeted promotions that are more likely to succeed.
Creating Urgency: Limited time offers and flash sales can create a sense of urgency, encouraging immediate purchases.
Cross-Promotions: Bundling products or offering discounts on complementary items can boost sales without heavily discounting individual products.
Optimizing Promo Intensity and Depth: Balance the percentage of items on discount and the depth of the discount to ensure promotions are impactful but sustainable.

Recognizing the difference between a promo problem and a markdown problem is crucial for retail success. By focusing on more effective in-season promotions, retailers can engage customers better, drive sales and protect margins. Strategic promotions not only reduce the need for steep markdowns but also enhance the overall customer experience and brand value.

If you would like to learn more about how you can use the latest artificial intelligence (AI) tools to manage your retail promotions and markdowns, talk to us about how PromoAI and MarkdownAI makes it easy to do just that.

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