Improving Margin, Sales, and Customer Loyalty White Paper

Escape the Promotional Vortex: Create More Profitable Promotions

Table of Contents

Escape the Promotional Vortex: Create More Profitable Promotions . . . 1

So what created this damaging vortex? . . . . . . . . . . . . . . . . . . . . . . . 1

How to Escape the Downward Spiral . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Answer the Big Questions First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

What is the company’s value proposition? . . . . . . . . . . . . . . . . . . . . . 3

Test promotions with simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Crawl Walk Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Organizational Inhibitors to Success . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 1

Escape the Promotional Vortex: Create More Profitable PromotionsIt should come as no surprise to even the most casual observer of retail trends that promotional activity has increased substantially over the past few years . What may not be as apparent is that the increase in promotional activity has not had the desired results . The frenzy of promotions may, in fact, be driving retailers into a downward spiral, a vortex of increasing promotions and decreasing sales and margins .

The Christmas season of 2013 is a case in point . Retailers took the traditional Black Friday sales events and moved them up in some cases right into Thanksgiving Day . Rather than increasing sales, it simply moved the transactions to an earlier time and, no doubt, cost the retailers margins because of increased selling costs due to being open on a day when most, if not all, major retailers were traditionally closed . Consumers spent an average of $407 .02 from Thursday, November 28 to December 1, 2103, down from $423 .55 during the same period in 2012 (source: NRF) . Black Friday (or Thursday) saw the first year-over-year decline since 2009 . In short, the promotional event starting the holiday shopping season was a failure (source: Time) . Not only did the promotional activity not produce additional sales, it may have reduced overall sales dollars by over-promoting . The shopper was definitely the winner in this scenario, the retailers the losers .

In addition to the overall promotional activity, the increasing growth in on-line shopping created more uncertainty around customer behavior and price sensitivity . The small, yet high-growth online channel has an effect on promotions through the bricks and mortar channel but no one has yet figured out what or how impactful that effect is . While Black Friday was moved forward into Thanksgiving Day, the Cyber Monday deals extended into Tuesday . Nowhere in this scenario was there any indication that forecasting was used to determine the best mix of tactics . Results of the two promotional events revealed lower revenues, thus indicating an epic failure .

So what created this damaging vortex? The growth of promotions is rather like the old fable of the tortoise and the hare . The hare, in this case the over-promoting retailer, surges ahead in the short term, taking away sales from competitors and achieving short-term top-line sales targets, while the tortoise, the more disciplined retailer moves along at a more sedate pace, focused on the long term goals of brand image and customer loyalty .

Pursuing the hare-like tactics of unrestrained promotions has created an unfortunate customer mindset . “The deal is not so special anymore,” according to Alison Jatlow Levy, a retail strategist at consulting firm Kurt Salmon . “The deal has become the norm . And if the deal is the norm… it actually just trains the consumer to never buy at full price” (source: USA Today) . Even more compelling is the fact that “ a couple of weeks before Christmas [2013], nearly half of all shoppers said they were waiting until the arrival of 70% off sales before they’d buy (source: Time) .

White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 2

Clearly, the current promotional frenzy is training shoppers to wait for multiple and deeper discounts . Retailers have trained shopper’s behavior to their own detriment . The promotions frenzy is not going to increase profits or margin for anyone . In short, this focus on sales and revenues while disregarding profit and margin leads to a downward spiral of increasing price competition, which further reduces margins . This is the dangerous vortex in which retailers now find themselves .

Given this reality, it is startling to find that many retailers are incapable of quantifying the effectiveness of promotional events and are hard-pressed to adapt historical campaigns utilizing factual strategic insight into shopper response and promotion effectiveness . A good starting point would be to consider promoting products that customers actually want .

Furthermore, the presumably same retailers do not use analytics widely available today . Other such disturbing revelations came out of a research study, “Promotions in the Retail Industry” by Simon Kutcher & Partners . The study revealed that a small minority of companies are measuring elasticities of the products being promoted and even fewer measure the effects of promotional prices on other products (cross-elasticities) . These two components, in conjunction with price thresholds, are part of the calculation for “value pricing,” without which a retailer cannot optimize promotions .

How to Escape the Downward Spiral Use promotions offensively rather than defensively .

Some basic tenets of good promotions must be followed if success is to be achieved:

• Promote the right products for the right consumers. Promotions should be designed to appeal to the highest value and most price-sensitive customers.

• Measure incremental sales and profit from individual promotions. The goal is not to maximize sales “on deal,” but to generate sales, acquire new customers and increase profits – all results that a retailer would not have been able to get achieve otherwise.

• The advertising exposure of some promotions is as important as the redemption effect. That is why it is called a promotion and not just a temporary price cut.

Excerpts from “Retailers, Here’s Why You Shouldn’t Skimp on Promotions” by Kusum Ailwadi, PhD. (Tuck) and Paul Farris, PhD. (Darden)

White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 3

Answer the Big Questions First

What is the company’s value proposition?If you can answer this question, then you are well on your way to creating smarter, more effective promotions . Overall, a retailer needs to focus on the value proposition they are presenting to the market . Factoring in the service component of the value proposition will move a retailer further away from competing on price . With the brand image factored in to your planning, your promotional strategy and tactics should perform better .

While it will provide strategic guidance and a tactical discipline, determining a value proposition and adhering to a consistent brand image will not, alone, make for better promotions . So what to do to become the smart tortoise of the fable? Take advantage of tools available that enable retailers to plan, optimize, measure and analyze promotions in a virtuous loop .

• Define your goals

• Plan your promotions

• Execute precisely

• Measure the results and adjust going forward

Revionics Promotion Optimization is one such tool . The SaaS solution enables retailers to plan and execute optimized promotions with science-based analytics . Effective promotions require effective planning through science and analytics . The solution supports this activity through a user friendly, interactive environment that:

• Supports cross-functional planning, on-going analysis and effectiveness measurement

• Simulates uplift and forecasting performance of alternative offers and vehicles in a highly visual and user-friendly interface .

• Creates optimal offers across the promotional matrix of channels, media markets, touch points and shopper segments .

Test promotions with simulations“Black-box” optimization solutions are a thing of the past . Revionics’ solution provides transparency into the optimizations, enabling users to understand the ‘why’ behind the recommendations . Just as post-event analysis is important so is pre-event analytics . With our simulation capabilities the user can generate multiple scenarios to enable better planning by comparing and contrasting the results of different promotional strategies and tactics prior to execution . With the solution’s forecasting and measurement tools, retailers can finally create and execute promotions that improve margins, profitability while strengthening brand image and building customer loyalty .

• Define your goals

• Plan your promotions

• Execute precisely

• Measure the results and adjust going forward

White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 4

Crawl Walk Run

Partnering with Revionics allows the retailer to remain in control of the implementation process. This is a journey and, in keeping with that reality, the software permits a process we call “Crawl. Walk. Run.” The retailer can get comfortable with the process and promotion-building features of the tool while still using their internally developed promotions. With scenario simulation capabilities and post-promotion measurements and analysis, the retailer can see how recommendations for optimized promotions might perform when compared to planned or executed ones. As the retailer grows more comfortable with the solution and gains insight into how the recommendations are achieved, the company can increase acceptance of optimized promotions. During this time the demand models are automatically updated as the Revionics solution continues to build promotions and self-learns how sales are affected by the different vehicles and tactics that are used. This will methodically move a retailer away from knee-jerk promotional activity and towards a disciplined approach around forecasting, optimizing and measuring promotional activity.

Organizational Inhibitors to SuccessOne of the most daunting inhibitors to effective promotions is the traditional siloed organizational structure found in many retailers . Siloes inhibit collaboration, execution and results, which is critical for success as promotions require cross-functional implementation . The Revionics solution enables collaborative planning across the various departments involved in the promotions development and execution process . Additionally, the solution provides for dynamic workflows that automatically adjust prompts for promotions creation based on the complexity of the promotion . This dramatically simplifies the complexity of the promotions process . With dynamic versioning, the solution automatically creates versions of promotions for various media markets based on products carried or not carried in the stores and automatically updates the promotion when products selected for future promotions change after the promotion is created . These capabilities radically change the game for retailers by streamlining inter-departmental management and automating complex activities, while coordinating and communicating both plans and results .

Promotion optimization science and analytics will enable a retailer to become the tortoise and reach the finish line ahead of the reckless hare, which translates into beating their competitors with profits and margins intact – all while retaining a positive brand image and strong customer loyalty .

White Paper | Escape the Promotional Vortex: Create More Profitable Promotions | Version Date: May, 2014 5

37,000+ retail sites Optimize with Revionics

Worldwide Corporate Headquarters5000 Plaza on the Lake, Suite 200, Austin, TX 78746 +1-866-580-7277 • www .revionics .com For more information, please contact: marketing@revionics.com

About Revionics, Inc.

Revionics delivers the industry’s most powerful End-to-End Merchandise Optimization solution, enabling retailers of all sizes to execute a fact-based Omni-channel merchandising strategy utilizing the most comprehensive set of shopper demand signals to enhance financial performance with improved customer satisfaction . Revionics’ solutions leverage advanced predictive analytics and demand-based science to ensure retailers have the right product, price, promotion, placement and space allocation for optimal results across all touch points in the Omni-channel shopping episode – online, in-store, social and mobile . Offered on a scalable, high performance Cloud-based SaaS platform, these solutions future-proof retailers from Big Data/Fast Data challenges, while providing speed-to-ROI . Over 37,000 retail locations globally and $150+B in annual revenue across grocery, drug, building materials, convenience, general merchandise, discount, sporting goods stores and eCommerce sites optimize with Revionics’ solutions . Revionics has been recognized as a 2012 Deloitte Technology Fast 500™, Red Herring Top 100 Global, Red Herring Top 100 Americas and JMP Securities’ Hot 100 Software Company . For more information, please visit www .revionics .com .