Designing a promotional strategy thatworks for apparel retailers

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2025-04-17

S工MON ◆ KUCHER& P瓦RTNERS

strategy & Marketl· ng consultants

Designing a promotional strategy that works for apparel retailers

Francesco Fiorese

Kristen St. Martin-Lipton Michelle Verwest

June 2014

Consumers’ purchase behavior for fashion and apparel goods has evolved in the post-recession period. Although global apparel sales pushed ahead in 2012/2013, growing by 6% to reach US$1.7 billion1, consumers have become more conservative due to the fragile macroeconomic climate and continue to place importance on promotions when it comes to their apparel purchase decisions.

85% of adults

identify promotions as an important factor in their purchase decisions2.

For retailers around the globe, this behavior has meant intense competition for a decreasing share of wallet and has translated to a steady increase in promo- tional activity. A recent statement in a Women’s Wear Daily (WWD) article reﬂects the strategy of many retailers these days:

“To capitalize on the available traﬃc, Express extended the duration and depth of discounts and was satisﬁed with its efort to clear inventories … ”3

But inundating customers with consistently broader and deeper promotions is not necessarily the answer and excessive promotions have been proven to hurt retailers’ bottom lines (see Figure 1). Gone are the days where deeper and broader is suﬃcient to draw in loyal customers and achieve desired sales and margin targets. Retailers must instead respond to this change in consumer behavior with promotional strategies that guide targeted customer segments through a migration path, linking the strategy to the objective for each customer segment to increase customer loyalty, and, therefore, the overall health of the business.

1 Euromonitor International

2 NRF Monthly Consumer Survey, January 2014 – May 2014

3 Arnold J. Karr, Lululemon Joins Fray with Cut to Forecast, WWD, January 13, 2014

Impact of promotions on apparel retailer bottom lines: Q4 2013 Financial Reports

Q4 2013 results Driving factors

Gross Margin dollars down

280 basis points

Falling clothing sales for 10th quarter in a row

Gross margin dollars down

180 basis points (US $12M)

Gross margin rate down

160 basis points

Figure 1

1 Gap Inc. Earnings Call, February 27, 2014

2 Bloomberg, January 9, 2014

3 David Moin, Headwinds Persist as J. Crew Enters Spring, WWD, March 25, 2014

“Promotional environment and actions taken to move through the inventory to make sure we ended the

quarter with current inventory and that we weren’t carrying a lot of inventory³”

“Increase in price promotion and mark-down activity” due to a slower holiday season”

“Heavy discounting that took place before

Christmas” with prices slashed by as much as 50%²”

Marks & Spencer

Levi Strauss & Co.

“Unusually promotional holiday season¹”

The Gap

J. Crew

Simon-Kucher has identiﬁed four promotional strategy foundation steps that retailers should consider when designing promotion plans:

1. Deﬁne promotion strategy and principles given

objectives and targets

2. Support promotion principles with analytics

3. Educate the organization and draft a promotion plan

4. Track promotion success

1. Deﬁne promotion strategy and principles given objectives and targets

Promotions can successfully drive desired behaviors and meet varying objec- tives for each target customer segment. For example, the objective of promo- tions may be to drive value and volume for one customer segment but penetra- tion and purchase frequency for another (see Figure 2). Before planning any promotion activity, a retailer should ﬁrst deﬁne how objectives vary by customer segment, keeping in mind product category (shirts, pants, etc.), channel (i.e. Factory, Retail, Web) and time of season (e.g. opening, mid-season, sale). At the end of the day, the type of promotion used to increase basket size of infrequent customers will look very diﬀerent from the promotion used to minimize canni- balization risk but maintain the brand image for loyal customers.

Mapping promotion strategic objectives to customer segments

		Customer segment
		A	B	C	D
Product category	1	Value	Volume	Volume	Frequency
	2	Value	Value	Frequency	Penetration
	3	Frequency	Frequency	Penetration	Penetration
	4	Volume	Volume	Penetration	Penetration
	…

Increasing the number of shoppers who purchase the product at least once in a given period

Increasing the number of times the shopper purchases the

product within a given period

Increasing the volume bought by the shopper at any time

Increasing the shopper’s spend per unit of volume

Purchase frequency

Purchase volume

Purchase value

Penetration

Figure 2: Deﬁning promotion objectives by segment – example

Once objectives are deﬁned, promotion principles should be established to guide the design of a promotion plan. The principles should document goals and decision factors, including:

Illustrative

Seasonal goals	Drive purchase volume in the middle of the season; drive turnover at the end of the season
Channel goals	Promote turnover in factory stores with deeper discounts
Depth factors	Maximum discount allowed is 40% – going deeper does not lead to incremental unit lift
Frequency factors	Limit number of promotions to 2 per season to prevent shoppers from adjusting their purchase habits to wait for future discounts
Vehicle factors	Implement a minimum purchase requirement on all promotions within retail stores to drive basket sizes
…

Figure 3: Deﬁning promotion principles – example

2. Support promotion principles with analytics

The best promotion principles are supported by analytics. Analytics not only ensure a retailer is using the most eﬀective promotion type, but also help with change management and building internal buy-in of the promotion objectives across the organization. Common sources of analytics include:

• Historical data analysis

• Management level or store associate surveys

• Customer research

• In-store market tests

How does a retailer know which source will work best for their given situation? There is a tradeoﬀ between the level of sophistication and resource require- ments behind each source. However, a best-in-class approach will utilize histor- ical data analysis and incorporate in-store market tests.

For historical data analysis to be worthwhile, a retailer must ﬁrst ensure that all promotions are tracked systematically and that unit sales and price points can be tied back to speciﬁc promotions. Once a systematic tracking process is in place, historical data analysis can provide insight into the right depth, frequency and vehicle to use, building a foundation to support promotion principles.

Simon-Kucher project example

Simon-Kucher recently used historical data analysis to help an apparel retailer, whose goal was increasing inventory turn within one of their main categories (Category 1 in Figure 4), realize that deep discounts actually cannibalized sales and that the category required fewer discounts than other categories. As dis- played in the following chart, Simon-Kucher helped the retailer discover that the demand for Category 1 was almost twice as elastic as all other categories, meaning less deep discounts could achieve a similar inventory turn as that achieved for all other categories.

Post promotion analysis: Average weekly performance

300%

Revenue Lift Volume Lift

250%

Category 1 demand was almost

twice as elastic as all other

categories, meaning that less deep discounts in category 1 could

achieve similar inventory turn

150%

100%

50%

Category 1 All other categories

Promotion discount

25% 30%

200%

Figure 4: Historical data analysis – example

Keep in mind, though, that analytics should not be the ﬁnal decision factor in setting a promotion plan. Expert judgment and historical experience should always be combined with the results of any promotion analysis or in-store test.

Clearance pricing strategies at Zara4

Zara is a Spanish-based fast-fashion retailer belonging to the Inditex group, selling its products through 1800+ stores in more than 80 countries world- wide. In FY2013 net sales amounted to €10.8 billion.

Clearance periods. Zara has winter and summer clearance periods, which require a large amount of stock withdrawn from its stores during regular sea- son periods to be redistributed to its network. This happens over several weeks before the beginning of each clearance period. Throughout the clear- ance period, prices need to be adjusted to minimize the inventory left for liquidation at the end of the period, when it will have to be sold to wholesale buyers targeting low-price channels, mostly in developing countries.

The pricing strategy aggregates products into homogenous clusters, charac- terized by the same product type and retail price. Clusters within a given price range are aggregated into categories, which are assigned a clearance sales price, which is to be updated on a weekly basis throughout the clear- ance period.

A data-driven pricing strategy. In 2009 they carried out a pilot study in Europe to test a statistical model to optimize markdowns across diﬀerent product ranges in womens apparel. This model acted as a decision support tool to recommend target prices for test groups in Ireland and Belgium, and was closely adhered to by the involved country managers. Product groups priced according to the model performed better than control groups, yield- ing an estimated increase in clearance revenues just shy of 6%.

The model was fed historical data from regular season periods and clear- ance sales from previous year, and performed a regression analysis to fore- cast the expected demand for each product, and ﬁx prices accordingly. After the successful pilot study the model was implemented by Zara’s IT depart- ment, and made available to country managers worldwide as the standard markdown pricing tool for pricing recommendations, sales predictions, and revenue projections.

Takeaways. This success story points out the importance of data-driven de- cisions when it comes to choosing the right price for promotional items. Even if at the end of the day choices lie with the management, adequate decision support tools are key to boosting performance.

4 OPERATIONS RESEARCH Vol. 60, No. 6, November–December 2012

3. Educate the organization and draft a promotion plan

Once the principles and analytics are in place, a retailer should institutional- ize smart pricing and promotional planning through internal education and a comprehensive plan. The most eﬀective promotions for each target segment and product category should be communicated across the organization. By combining the strategy, principles and analytics, retailers can build a proper pricing and promotion plan, outlining the promotion tactics (i.e. the type of promotion, depth, frequency and time of season) and communication meth- ods for each category and channel by customer segment. Frequent check- ins (e.g. weekly meetings) between the owners of diﬀerent marketing and promotion initiatives can avoid too frequent price communication with cus- tomers and prevent promotion fatigue.

Promotion plan by week

Week		1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26
Retail stores	Category A
	Category B
	Category C
	Category D
E- commerce	Category A
	Category B			Outl	et to	pro in	mote	ex	cess
	Category C			prior	sea	son
	Category D

Promotion tactic and communication methods

Multi-buy email campaign >40% sale section

on-line coupon code

No promo

25%-40% off in-store & on-line coupon code

Clearance section

15%-24% off in-store &

re from

retail

vent

ory

sto

Figure 5: Promotion plan – example

4. Track promotion success

Retailers should establish procedures for tracking eﬀectiveness of the pro- motion plan and have contingency plans in place as needed. Commonly tracked KPIs include week-over-week unit sales comparisons, incremental revenue, margins, store traﬃc, etc. However, a best-in-class measure of pro- motion eﬀectiveness will also consider the impact of the promotion on other product categories (both unrelated and complementary) not directly includ- ed in the promotion. By looking at the eﬀect a promotion had on an overall portfolio, a retailer can ensure that a promotion is successfully achieving ob- jectives and use the learnings to inﬂuence future promotion plans.

By applying these four promotion steps, retailers can eﬀectively design their promotional strategies to attract customers in today’s challenging competi- tive environment while maintaining long-run proﬁtability. An eﬀective promo- tion strategy is especially important for retailers today, considering the impor- tance customers place on promotions and aﬀordable prices when making apparel purchase decisions. By understanding their customer segments and providing a clear structure and communication for promotions, retailers can rise above the clutter and strengthen their business with healthier, more sus- tainable margins.

About the Authors

Francesco Fiorese

Director at Simon-Kucher’s Milan oﬃce

Francesco has extensive experience in strategy and pricing for consumer and manufacturing companies.

email: francesco.ﬁorese@simon-kucher.com

Kristen St. Martin-Lipton

Senior Consultant at Simon-Kucher’s New York oﬃce

Kristen has vast experience designing pricing and promotion strategies for global consumer and retail companies.

email: kristen.stmartin@simon-kucher.com

Michelle Verwest

Senior Consultant at Simon-Kucher’s San Francisco oﬃce

Michelle has nine years experience “on the ground“ in the apparel retail industry: working in strategy, merchandising, and planning for multiple apparel retailers.

email: michelle.verwest@simon-kucher.com

About Simon-Kucher & Partners

Simon-Kucher & Partners is a global consulting ﬁrm with 700 professionals in 27 oﬃces worldwide focusing on Smart Proﬁt GrowthSM. Founded in 1985, the company has almost 30 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.