How to Evaluate Promotions

As markets develop and grow, price promotional spend becomes a major portion of a company’s overall spend, hence the scrutiny around it. And it is a weird one because this bucket of spend is not straight forward to evaluate. Why you are investing in a promotion is as difficult a question to answer as is why the universe exists.  Here are some methods to determine the financial effectiveness of activations:

1. Retail Sales Value (RSV) Uplift

One way is to simply use the RSV (retail sales value) uplift method. Just see how much of incremental RSV you are doing when running the promotion in % terms. Because of its simplicity and because RSV is what the retailer cares about, this is a very commonly used measure.

Every time, you run a price promotion, you shave off sales value from each unit sold on promotion including the ones you would have sold as base volume anyway. Since we are looking at RSV uplift and not volume uplift, you may eventually end up in a place where your revenue in terms of RSV from your volume uplift does not offset the discount you are giving away on the base units. For a promo to net off at an RSV level, the deeper the discount, the higher the % volume uplift will have to be disproportionately. In other words, the relationship between % discount & required % uplift to break even is non-linear. It’s an upward sloping curve.

2. Incremental Profit

A more comprehensive measure is the incremental cash profit generated by a promotion compared to the scenario without it. As retail landscapes become more mature, the retailers’ price competition among themselves becomes increasingly intense. They start asking for deeper promotions with more shopper marketing spend to support them. As a consequence, our criteria starts shifting from maximizing gross profit to ensuring the activations are atleast not unprofitable to being clear as to why we are running an unprofitable promotion e.g encouraging trial, driving penetration, gaining market share etc

3. ROI % (Return on Investment)

ROI is a more nuanced measure, evaluating incremental profit as a percentage of the additional investment made. This method allows you to compare promotions across different products, customers, or time periods. It’s particularly useful for allocating limited resources effectively, much like an investment fund assessing which opportunities to go after.

Formula:ROI % = (Incremental Profit / Additional Spend) × 100

Reducing promotional performance to a single ROI figure helps ensure consistency and transparency when evaluating various options.

One key consideration with ROI is the appropriate timeframe for measuring incremental profit. Does it include only the promotion period? Or should it also extend to subsequent months, to capture repeat purchases and "pantry stocking," where shoppers over-purchase during promotions and reduce their future buying frequency. Understanding this dynamic and then achieving a common understanding across the business and with the retailer is critical for long-term profitability assessments.

100% ROI is what you need to breakeven.  The challenge arises when you find out that almost all the promotions you have been running have ROI% < 100% (not very uncommon).

What do you do then? Do you stop promoting the brand at all and lose market share? Are you prepared for your brand to sit on shelf un-activated all year round (in most developed market retailers, it is difficult to get secondary space at full price). Do you really expect to recruit new shoppers without incentivizing them through a price discount on shelf? (its difficult to grow consistently grow FMCG products without activating them in developed markets).

Exceptions to the Rules

When would you run a promotion that you know is not meeting your minimum evaluation criteria:

• SKU Delisting Risk: As markets develop, number of SKUs proliferate which then start making retailers to think of “range rationalization” both to make best use of the real estate they have and also to reduce the paradox of choice of shoppers. When a product is underperforming or at a risk of getting delisted, promotions may be necessary to boost sales, even if they fail on standard ROI or profit metrics. In such cases, it is best to calculate the potential cash profit loss if the product is delisted completely and determine how much promotional loss you are willing to afford to prevent it.

  
  

• Market Share objective: Market share gains are another consideration when evaluating promotions. Rather than an evaluation method itself, it is an objective that one should be wary of. If the promotion successfully increases your share of the category, it may justify a short-term sacrifice of revenue, profit, ROI etc.

• Generating Trial: If there is a new product launched, bringing it under the spotlight to win the shopper’s attention, and nudge them to purchase it because it’s an attractive price is almost considered a part of the playbook of a new product launch.

  
  

• Repeat purchase assumption: This is the assumption that a certain % of shoppers who are lured in to buy our products due to a temporary value offering, would like the product and would later not mind buying it at a higher price. However, this assumption is difficult to validate even in developed markets which have plenty of data.

• Response to a threat from competition: Ofcourse if you are under attack then often protecting your territory overrides everything else.

  
  

Final Thought

Evaluating promotions requires balancing short-term metrics like RSV uplift and ROI with long-term strategic goals, such as penetration and shopper loyalty.

Ultimately, the best promotions are those that not only deliver immediate results but also strengthen the brand’s position for the future.