Devising meaningful promotions can drive customer loyalty and retailer turnover

Tesco price promise

dunnhumby believes there's still a place for quality promotions in grocery retailing

Howard Langer dunnhumby price and promotion UK managing director
Howard Langer

The stellar performance of the discount chains has prompted major UK supermarkets to battle it out on the price front of late, while consumers remain confused about the validity and, at times, the honesty of promotional tactics. With Nielsen apparently claiming that over half of promotions don’t actually work, the recent strategic partnership announced between customer science company dunnhumby and Florida software firm Aptaris is well-timed to offer a solution. Produce Business UK asks dunnhumby’s UK office how retailers can optimise their promotional strategies and ultimately drive profit

“There are so many promotions going on, customers don’t know what a good promotion looks like anymore,” begins Howard Langer, managing director for price and promotion at dunnhumby in the UK. “Customers are saying they are too confusing, and according to Nielsen, 59% of promotions don’t work. If they don’t break even, what’s the point? It’s like tossing a coin.”

Just last week, the Money Advice Service published research that indicates UK supermarket offers are confusing shoppers and enticing them to spend 21% more per trip, or an additional £1,300 each year.

The release coincided with this response from UK consumer regulator the Competition and Markets Authority (CMA) to a super-complaint from Which? in which the consumer group demanded action against supermarkets.

Contrary to media speculation (such as this report in The Telegraph), CMA said it is not contemplating banning supermarket buy-one-get-one-free deals and special offers. Instead, CMA confirmed it is working with businesses to ensure supermarkets’ promotional practices can be clearly understood by shoppers and are not misleading. It expects to provide further details of its engagement with retailers in the next few weeks.

Despite retailers having evidently overdosed on marketing tactics like buy-one-get-one free (BOGOF), multi-buys and special offers, Langer still believes there’s a place for promotions in grocery retailing.

“It comes down to everything in moderation,” he says. “Promotions absolutely have a role to play in driving footfall and creating theatre. But it’s the quality of the promotion that counts, and, like everything, you can overdose. The UK retailers in general have done that and they are realising they can’t carry on.”

Langer puts the widespread number of promotions down to retailers not really understanding who their best customers are anymore. This is where dunnhumby, a leading customer science company, comes in. “We’re trying to reverse the trend,” he says. “Most of the big grocery retailers want to wean off promotions. We want to help and only promote where it drives loyalty and makes financial sense.”

With retail profitability hard to come by in the current economic climate, and margins low, particularly in grocery, Langer claims there is a real and lucrative opportunity for retailers to make promotions work better.

“In grocery, 40-60% of the lines are on promotion at any one time, so being able to make better decisions in managing those promotions is probably the biggest way to make money these days,” he says.

What makes a promotion valuable?

To improve the quality of promotions, Langer states retailers first need to assess who is going to respond to the promotion – to ensure they are targeting their valuable customers effectively.

Watch this video to learn more about customer-first pricing and promotions:



“With the performance of the discounters and the whole price and promotion war in the UK right now, it’s never been more important to work out who your loyal customers are,” he says. “If you’re going to promote, it should be to customers you care about, so the key is to focus on those lines that your valuable customers care about.

“A loyal customer is worth 12 uncommitted customers to a retailer in terms of profit, so if you spend more time with loyal customers they’ll repay you,” Langer continues. “The more you can do to invest in your loyal customers, the better – that’s where you should spend your money.”

As an example, Langer says if a retailer discounts the price of specialty potatoes because data shows those varieties (rather than standard white potatoes) are what the firm’s loyal customers are more interested in, the retailer can sell more and strengthen its customer loyalty in the process because those shoppers got a good deal.

Equally, if 99% of a retailer’s standard white potato line is sold to price-sensitive customers, then to raise the price might not make sense. If a retailer is making choices to sell a particular segment, Langer says the firm must first work out which customers are buying that product in order to price and promote it effectively.

“You can’t promote everything to everyone, so if you work out the impact [of a prospective promotion] on your loyal customers you can throw out a whole load of promotions that won’t work for you,” he adds. “That way, you’ll tend to run promotions that are better for your loyal customers and that’s how you’ll grow loyalty.”

Over the last couple of years dunnhumby has done a lot of work with Tesco to discern who are the retailer’s most important loyal customers. Langer believes progress is being made. “We have seen a turnaround in performance at Tesco during Christmas [2015],” he states. “Things are moving in the right direction – customer numbers and volumes are up. We are definitely playing our part but we can’t claim all the credit, of course.”

Watch this video to see a Tesco case study:



How dunnhumby-Aptaris can help

With the success of a promotion determined largely by the way it has been planned and selected – a process which Langer claims is currently “pretty poor” in UK retail – dunnhumby’s link-up with Aptaris is designed to solve the problem.

“dunnhumby is a customer science company; we are all about customer loyalty data and we pour that science into our software and consulting,” he explains. “We offer sophisticated calculations behind the scenes, while Aptaris delivers the promotions planning software.”

The partnership will work through dunnhumby applying financial and customer forecasts using calculations from its PriceStrat price optimisation tool – which enables science-based forecasting largely through customer loyalty card data – to the Aptaris promotions management software, a user-friendly system that retailers can use to plan and forecast their promotions, as well as communicate with suppliers via a vendor portal.

Within the Aptaris system, buyers can scenario plan (forecasted according to dunnhumby science) and see in real time what would be the financial impact of a potential promotion, thereby also allowing buyers to simultaneously negotiate with suppliers.

“Buyers can instantly see the impact that a price change, BOGOF promotion, coupon or voucher would have on their sales units, cash margin and vendor funding,” notes Langer. “They absolutely would know what the financial results [of that promotion] would be and for which customer segment.

“We believe it will lead to a lot more profitable promotions because our forecasts are incredibly accurate. We’ve spent 20 years refining them, particularly for the grocery business, and they include switching or cannibalisation. We’re really trying to help buyers understand the quality of their sales.”

Within the Aptaris system, retailers and their marketing teams can also see the potential impact of product placement in weekly, bimonthly or monthly promotional flyers, circulars or press advertisements. The new solution also allows retailers to forecast the impact of displaying on-promotion products at the front of their stores, as well as the effect of different advertising methods.

“You can drag your on-promotion products into a flyer, change the price, the page positioning or move on-promotional items around in a press ad and see the different financial impact of doing so,” Langer explains.

“That’s hugely beneficial. Each week, retail-marketing teams have a big debate over which products get on the front page. It comes down to gut feel, or whoever shouts the loudest or who has biggest funding but none of that takes the customer into account. In the USA some of our clients have found there are products on page one of their ads that don’t need to be there because when they move them the sales don’t fall.”

Langer says the dunnhumby-Aptaris tool therefore goes some way to improving efficiency within buying and marketing teams.

“The planning process in grocery retail now is largely very manual and decisions often get made at the eleventh hour, which is not a very conducive environment for decision making,” he explains.

“This [solution] offers a better workflow. The forecasts are instant, buyers don’t need analysts, and the process is designed to be a lot easier for everyone concerned as it requires a lot less reworking. There is far less emotional debate and discussion so promotions should be signed off a lot quicker. The retailers we speak to reckon their buyers spend 80% of their time each week trying to set up promotions. If you can make that process a lot easier, the amount of time saved would be immense.”

PriceStrat

At the heart of the deal is dunnhumby’s science-based price forecasting tool, PriceStrat, which helps to give retailers deeper insights into their shoppers and markets.

“PriceStrat can make prices clean and more understandable for customers – that helps retailers to maintain price integrity on the shelf,” notes Langer. “It can forecast the impact of normal price changes and promotion changes, as well as price optimisation.

“For example, you can ask PriceStrat what would be best price for a particular fresh fruit to grow my sales by x%. It will work the best price so the buyer can sign off on that.

“PriceStrat also offers a promotional analytics tool, which is new for this year. It can show you whether each promotion has worked, how customers switched between products, if you made money, which customers bought the product and which tactics were better. For instance, you might discover it’s better to offer 50% off broccoli than a BOGOF promotion, and by how much.

“Another tool within PriceStrat is the ability to forecast stock levels and out of stock items – it’s highly accurate and can forecast in real time.”

Looking ahead to future development, Langer reveals there are plans for research and development between dunnhumby and Aptaris outside of their traditional software set.

Who can use the dunnhumby-Aptaris system?

Since dunnhumby is owned by Tesco, the set-up limits to a large degree who the company can work with in UK grocery retail. However, within the fresh market Langer says the software is available to convenience players and independent retailers.

For those that don’t operate a loyalty card scheme, Langer says dunnhumby can either use the retailers’ (privacy protected) credit card data or simply apply its PriceStrat pricing science to the Aptaris programme.

Those wishing to use the software would typically pay an annual license fee based on the retailer’s number of users, stores, products and transactions.

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