Sales promotions are short-term strategies that "pull" shoppers into retail stores with incentives to "buy now." They account for 65 to 75 percent of the combined advertising-promotion budgets of many major consumer products companies, according to Northwestern University marketing professor, Philip Kotler. Small-business owners, however, often don't know if promotion sales bumps justify the costs. Hence, marketing practitioners recommend analyzing your sales promotions to determine if you're getting your money's worth.
Incremental vs. Borrowed Sales
Despite the near-universal embrace of sales promotions as drivers of short-term sales, marketers are challenged to establish if short-term sales lifts represent "incremental" sales or "borrowed" sales from the future. Depending on the category, sales bumps generally fall into three categories: new or returning users, current users moving their purchases forward and current users stocking their pantries. True incremental sales come from new and returning users. Borrowed sales come from current users who speed up purchases or stock their pantries. The main issue in analyzing sales promotions is determining the sales increase drivers.
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Use Your Own Data
The most common and economical way to analyze promotions is to use your own internal data to compare sales before, during and after the promotion. Assume that you averaged monthly sales of $1 million on a promoted item before the promotion. Sales then jumped to $1.3 million during the promotion, declined to $900,000 immediately after the promotion and finally tapered off at the starting level of $1 million per month. You might conclude from this scenario that the promotion borrowed from future sales, which could call into question whether you got your money's worth. However, if sales finally tapered off at $1.2 million per month, you could conclude that the sale attracted new users, which accounted for the long-term incremental gain of $200,000 per month, or $2.4 million a year.
Other Analysis Techniques
If your budget permits, you might consider purchasing scanner sales data from vendors such as The Nielsen Company or Information Resources Inc. Major consumer products companies commonly contract with one or both services. Scanner data offers the advantage of allowing you to analyze the types of people who bought on the promotion and their buying behavior before and after the promotion.
Consumer surveys are another option to consider if you want to drill deeper into buyer motivations in terms of whether the promotion will affect future buying decisions. You also can analyze promotions through experiments, which allow you to test different incentive values, duration of promotion periods and media alternatives to distribute the offer.
Return on Marketing Investment
Return on marketing investment -- ROMI -- is a popular way to analyze sales promotions. The math is straightforward. Subtract the cost of a sales promotion --the "marketing investment" -- from the incremental net revenue obtained from the promotion, then divide that figure by the marketing investment and finally multiply the resulting figure by 100. Assume your incremental net revenue is $500,000 and the cost of the sales promotion is $400,000: ($500,000 - $400,000) equals $100,000. Divide $100,000 by $400,000, which equals 025. Multiply 0.25 by 100, which equals 25 percent. ROMI is commonly used by major corporations to allocate scarce marketing dollars among competing marketing programs.