Promotional forecasting: Improve Product Distribution Efficiency!
Promo is an effective tool for stimulating sales and a significant cost item for manufacturers and retailers. Promotion forecasting allows you to optimize the supply chain for promotional goods and reduce business costs. How to get a high-quality forecast, and what pitfalls are encountered at different stages of the process, — says Anton Tsemerov, forecasting specialist and senior ERP consultant at Consulting for Retail.
A bit of theory about promo
There are various promo mechanics: a discount on a product, 1 + 1, such as “buy one product, get the second as a gift” or when buying the first, you can buy the second with a 50% discount, an offer to buy a set of goods or three identical units for the price of two or, buying for a certain amount, customers receive points, which can then be used for further purchases, and other options. The initiator of the action can be both suppliers offering goods promotion, and chains, to stimulate demand and attract customers.
The ways of interacting with customers can be very different: a booklet, a catalog, mailing to the subscriber base through mail services, or instant messengers.
The network will also have to determine the number of goods positions that should be included in advertising on billboards, how many cells should be allocated for advertising in the catalog, how many shares should be from suppliers, the depth of the discount, and the relevance of the offer to the buyer. That is, the network sets the rules for the promo.
In the future, the retailer determines the timing of the promotion, agrees on prices, and then the question arises: how many goods should be purchased? There are usually three solutions here:
- Purchase volume recommended by the supplier.
- The buyer determines the volume based on his previous experience.
- The recommended volume is calculated as part of the forecasting and order (special systems calculate based on analytical models).
What is very important to consider is the promo growth rate relative to regular sales. As one of the approaches to its calculations, the principle of price elasticity can be applied. The price elasticity of demand reflects the degree of buyer's response to changes in the cost of the SKU. For example, a chain usually sells 10 bags of sugar. If the unit cost is reduced by 10%, we get a 3x increase in sales. With a discount of 20%, the increase will increase by 5 times. That is why, the sooner the network agrees with the supplier about the promotion and receives a better price for the goods, the more “gap” it will have for the maximum possible price elasticity. Therefore, it is more accurate to calculate growth rates from regular sales. Usually, all calculations are based on the history of previous shares.
At this stage, possible means are used to calculate the volume for different types of promotions. For example, for a 1 + 1 promo, you need to calculate the amount of an additional SKU, and predict and order it. Based on the results of the calculations, we obtain the forecasted quantity of goods. In the future, the network places an order for the warehouse and distributes goods to stores by the rules defined in the network.
These rules depend on what levels of sales stores provided, their format, and location. It is appropriate to note that there are promo-dependent stores in which goods are sold only if there is a promotional offer. Also, the distribution is highly dependent on geographical location. It is more likely that in a rural store, coffee sticks, even at a very favorable promotional price, will remain unclaimed.
To summarize, when organizing a promo, it is important to ensure the purchase of the required volume of goods before the start of the promotion, carry out the distribution, and then maintain its stock throughout the entire period of the offer. An important thing when promotion forecasting is planning to exit the promotion. Let's talk about all this in more detail.
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Where to start promotion forecasting?
In any calculation, input data is important. What information should be collected and stored to make the forecasting as accurate as possible?
First, you need to maintain a marketing calendar, or, in other words, a calendar of cause-and-effect relationships, in which data on promotions are recorded. Let's say a specific product in certain weeks or days participated in a promotion with a 5% discount, and what real sales were as a result of the promotion.
Secondly, you need to classify all promo, that is, break them down into types. Each type of share is assigned its identifier. As a result, the types of promotions are systematized.
Thirdly, the necessary statistics for promotion forecasting necessarily include historical data, which includes:
- promotional sales history, providing insight into how SKUs were sold in the past. The company must maintain a promo calendar (fix promo periods, what goods and stores participated, what were the growth rates);
- the history of sales of goods is constantly involved in the promotion. To translate/explain it, you can use a special variable – impact. With the help of the impact, you can explain to the system an event/promo that has happened in the past. That is, the impact reflects the trend in sales of goods in past periods and suggests that the same result will be achieved in the future.
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Also, when making a promotion forecasting, it is necessary to take into account the impact of promo on regular sales.
- Direct influence – when we take into account the history of promo sales in the past and can forecast future demand.
- The indirect effect of promotional goods on the sales of other SKUs can have absorption (cannibalization) or chain reaction (domino effect) effects. A simple example: sales of capsule powder at the regular price can be significantly reduced if the promotion includes weight powder at an attractive promotional price. This effect is also called cannibalization or transferable demand. Influence can have the opposite domino effect (chain reaction) where a good promotional price spurs the purchase of another related SKU. The simplest and most successful "tandem" is beer and nuts/crackers.
As a result, based on all these data, it is possible to correctly calculate the forecast of the promotion for the future. Doing calculations manually is labor-intensive and time-consuming, unlike a specialized system where the entire calculation is automated and provides high accuracy.
The mechanics of promotion forecasting in the system is simplified as much as possible. The user only needs to select the stock for which an identifier (impact) was assigned at the previous stage. Next, you should define the product, store, and week, for which the promo forecast will be calculated based on historical data and the impact that explains the sales trends in the past on the system.
If necessary, the forecasting system can take into account factors such as:
- an additional display on the shelf;
- additional places of display;
- other factors affecting volume.
The forecasting result will contain regular demand, seasonality, special periods, and promotions. The entire calculation process is automated, the user always has the right to make adjustments.
Optimal distribution of the volume of promotional goods
Based on the results of forecasting, an order is formed, and the total volume of goods is delivered to the warehouse. But how to properly distribute it among stores? For optimal inventory distribution in an automated mode, C4R supplies a special solution based on the software of a well-known vendor. The system takes into account many factors, such as the distribution plan and keys: which store and in what priority, and by what coefficient should one or another product volume be received under the promotion.
A key is essentially a distribution rule. It denotes, for example, store formats or other features of a retail outlet. If the store complies with this rule, then the consignment for distribution will be adjusted by it.
Without a forecasting solution, the chain has to rely on employee experience, store size, sales volume, and other outlet performance metrics. This approach often leads to errors, and those, in turn, to additional costs for the redistribution and transportation of goods between stores.
Exit promo the right way
The exit phase is the final stage. Its main task is to ensure that the retail chain exits the promotion with minimal inventory. This phase can begin at the very height of the promotional offer.
It is important to consider:
- Phase start dates: determined individually in each case. This is due to the specifics of the product, logistics for its redistribution, etc. The time to exit the phase depends on the history and seasonality of sales. For example, to speed up and stimulate sales of fresh products, a deeper discount should be given towards the end of the promo.
- Sales dynamics: this helps to redistribute the purchased volume of goods in time. If a product is not sold in one store or group of outlets, then it can be moved to points of sale where the sale is faster.
Promotion forecasting is inextricably linked to the distribution of inventory throughout the supply chain. In turn, the correct forecast allows you to reduce the cost of logistics and maintenance of residues after the campaign. On the scale of the trading network, these are large budgets that affect the margins of the business. Network management is looking for ways to optimize these costs.
The C4R team implements modern solutions for automating retail processes and provides retail audit and business process building services. To learn more about how our team is useful for your business, write to [email protected] or fill out the form below.
The author of the article is Anton Tsemerov,
ERP Consultant Consulting for Retail
