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The CQ: The most overlooked P&L line item
Is your brand discounting more than it should be?
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Annual promotional strategy and discount budgeting will put holiday sales into context
By Jason Bornstein, Principal
Last week, we shared how holiday sales have grown less important over the years. This week, with an eye toward unit economics and profitability, we’ll cover the most overlooked line item in the P&L — discounts — and how a broader strategy for promotions can pay dividends for a brand.
Holiday sales arrived early this year – Target, Amazon, Walmart and Best Buy each pulled forward promotions as the retailers aim to clear overstocked inventory and navigate inflation. For emerging brands, holiday discounts have become a game they are compelled to play to drive outsized revenue in the last quarter. While the holidays receive the lion share of market mindshare when it comes to sales, companies should take the holiday market shift as an opportunity to step back and develop a holistic discount strategy for the upcoming calendar year.
Promotions play a critical role in shaping how consumers perceive your brand in the market. A handful of Forerunner’s portfolio companies have proactively opted to not offer discounts in the early days of brand building with this in mind. But, remember the not-so-distant days when paying full price at J.Crew, Banana Republic, or Gap seemed foolish? If there wasn’t a deal today, there would likely be one tomorrow for at least 30% off. This promotion strategy trained consumers and has been incredibly difficult for the brands to unwind. The “Millennial Lifestyle Subsidy” and “Assisted Living for Millennials” captures this dynamic well and reaches far beyond traditional retailers – Uber, Lyft, ClassPass and Airbnb among others supercharged growth through unbeatable rates supported and at the expense of profitability. For example, when I interned at Forerunner in 2017, I paid $19.99 / month for unlimited $6 rides from my sublet to the office. In today’s profitability-minded market, those deals are long gone.
For emerging companies, promotions typically include new customers and holidays, and can include loyalty and markdowns depending on the category. Across categories, promotions provide a powerful growth lever to boost revenue. In the early days and ongoing throughout the evolving chapters of a fast-growing business, companies must balance the short-term upside of promotions with the long-term impact. The market has required businesses to reset priorities and trade profitability for growth – amidst this change, now is as good of a time as ever for companies to refine their approach to promotions. And remember that offering no promotions or skipping sale day is a viable option and growing trend in the market. REI, for example, announced this month that they will be closing stores on Black Friday for good going forward.
To get started, some best practices across our portfolio are:
Set a promotional budget: Having a budget for promotions and breaking down how you’d like that to be split across types of promotions (new customer, loyalty, holiday, markdowns) is an often-overlooked exercise. Discounts are a significant line item that often does not show up on the P&L. Budget for promotions in the same way you budget for inventory or marketing spend – promotional dollars should be just as precious to the business. Have the team manage to the budget throughout the year.
Create a promotional calendar: Determine how many promotional days you're comfortable with in a fiscal year. Start with how many you had last year and if you’d like to flex that number up or down. Stay disciplined here and keep in mind that promotions drive growth and in the short-term adding days is much easier than taking them away as you aspire to continue growth year-over-year.
Track top line impact: The percentage of revenue that comes from full-price, promotional, and markdown says a lot about your business. Can your team report this metric on a weekly basis? Aim for at least 60-70% of revenue coming from full-price sales and know how much revenue in a quarter and year comes from promotions and promotional days. This can indicate how reliant you are on promotions and be a check on the health of your business.
Segment customers: How valuable are the customers that you acquire during peak promotional days? Or that use a new customer discount? How much you can afford to pay to acquire these customers? Boosting revenue with promotions and low-value customers is a lose-lose that will catch up to you eventually. Stay focused on customer economics.
Iterate on the offer: There’s a sweet spot of the offer that feels right for a brand and that provides the optimal upside. While the idea of personalized discounts is enticing, it’s difficult to execute and the juice is often not be worth the squeeze. Stay nimble and creative in discovering the offer that’s most compelling to customers and accomplishes the goal you have. For example, 20% off first purchase typically drives significantly higher conversion than 15% off – if are already committed to have a new customer offer, are you comfortable with increasing from 15% to 20% to capture the upside?
Promotions are a strategic lever and market reality brands must navigate. Include them on the P&L. And aim to get to a place where you are coming from a position of strength and playing a strategic offensive game rather than finding yourself on your toes and scrambling to maintain growth trajectory in exchange for brand integrity.
This Week’s Top 10 Consumer Insights
Pinduoduo, one of the largest e-commerce companies in China, launched shopping app Temu in the US. The app is now the most downloaded shopping app in the US., beating out Amazon, Walmart, and Shein.
Researchers delve into the hidden language behind brand names. Going with misspellings or vowelless, using uppercase or lowercase logos— these tweaks are not just about securing a domain name. They reveal clues about the audience and product.
Out-of-stocks not only result in a missed purchase opportunity, but also leave consumers frustrated when they find out a product they want to buy is on backorder. New research shows how this can lead to up to 6% fewer purchases in the future if the delay is 10 days or longer.
Fedex and UPS have raised their rates an average of 5.9%, and retailers are coming up with inventive workarounds to save money on shipping costs: everything from scheduling deliveries around the weather to eliminating heavier products and asking customers to accept longer shipping times.
The new book from Eleven Madison Park co-owner, Unreasonable Hospitality, urges other businesses to take cues from restaurants. One suggestion is to give “something for nothing” as a treat to a regular customer, like how a chef might present an appetizer to a table in the house.
A new PBS documentary TikTok Boom explores the effects the social media platform has on kids and Gen Z. “When a company like TikTok starts collecting data about a child at age 10, by age 18, that algorithm might know your child better than you know your child.”
A Gallup poll reveals Americans’ optimism has reached a near-record low. About 57% believe it’s unlikely their children will fare better than them economically.
Building a personal brand is taking a toll on some creators. While they are no longer reliant on employer’s whims, many are grappling with the fluid boundaries between work and self, and a few are finding that putting yourself out there isn’t worth it.
Gen X could be beauty’s biggest consumer. They spend more than other generations, are comfortable shopping online and in-person, and have a spending power of $15 trillion—yet fewer than 5% of marketing focuses on them.
Nearly 65% of consumers plan to do at least some of their shopping in stores this holiday season, up from 58% last year. A few of the reasons noted are seeing the product in person, the ambiance, and avoiding shipping costs and delays.
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“There’s been a general shift happening over time and picking up momentum of sales shifting throughout the year. It really used to be make or break at the holidays for a retailer. And now over the years, sales have been pushed up. It went to Black Friday, to Cyber Monday, which took a lot of demand out of Christmas. Then Amazon came in with their June holiday, Alibaba has their Singles Day. A lot of that has been capturing demand throughout the year.”
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