Studies show 60%-70% of promotions do not work. The discount in prices do not result in a lift in sales that can offset the discount depth. Retail and FMCG companies have run promotions and sales for as long as these industries have existed. Promotions serve various purposes, from driving customers to stores to selling items at lower costs before their expiration dates. They can be seasonal or reactive to competitors' actions. While these are all valid reasons, most companies do not analyse the effectiveness of promotions in relation to the return on investment. This oversight often results in increased sales volume without a corresponding increase in profit, as companies fail to calculate the volume of sales needed to offset reduced margins.
The reality is that many promotions end up losing money rather than generating profit. According to McKinsey, the complexity involved in managing promotion variables such as seasonality, pricing dynamics and historical data is daunting. Human capacity alone struggles to interpret and structure this data effectively, leading to suboptimal decisions that miss potential profit opportunities.
AI-driven analytics offer a transformative solution by integrating historical data with real-time market conditions. This synergy enables precise price sensitivity analysis, empowering retailers to set competitive prices while safeguarding margins. Moreover, AI can decipher promotion affinity across product categories, guiding the design of promotions that resonate deeply with consumers.
Implementing AI and ML for the sake of it doesn't make sense. In the world of AI and ML, there is a vast toolbox of algorithms to apply. The skill and art lie in selecting the right algorithms for each product range or even applying multiple algorithms to achieve the best results. AI and ML models also benefit from continuous learning, meaning that promotion strategies become more effective over time as the system learns and adapts to new data.
Hennie Fouche, Managing Director at TrueNorth Group, emphasises: "AI and ML algorithms are not one size fits all. It requires careful implementation of techniques to ensure valid results.” This nuanced approach is crucial as retailers navigate the intricate landscape of pricing and promotions.
Benefits of AI in promotion strategies
Accurate price sensitivity analysis: AI enables precise calculation of price sensitivity by incorporating a wide range of factors, including customer purchasing behaviour, competitor pricing and macroeconomic conditions. This allows retailers to set competitive prices without sacrificing margins.
Effective promotion design: Analysing historical promotion data helps AI determine the promotion affinity of various products. Retailers can then design promotions that resonate with customers, driving higher engagement and sales. AI can also predict the optimal discount levels, ensuring maximum profitability. For example, determining whether a 5% or 10% markdown is more effective without eroding margins.
Optimised pricing and promotion matrix: By combining price sensitivity and promotion affinity scores, AI creates a price-promotion matrix to identify optimal strategies for different product categories. This differentiation ensures that promotions are tailored to specific customer segments and product types, maximising effectiveness and profitability.
Enhanced scenario planning: AI-powered scenario planning tools enable retailers to simulate the impact of various pricing and promotion strategies on sales and profitability. This predictive capability allows for informed decision-making, reducing the risk of adverse outcomes from promotional activities.
Improved demand forecasting and inventory management: Advanced AI algorithms forecast demand with high accuracy, aligning promotional efforts with expected market trends. This ensures optimal inventory levels, reducing both stock-outs and overstock situations, thus improving cashflow and reducing waste.
Real-world applications and insights
Consider an international online retailer that successfully implemented AI-driven promotion strategies. Initially, the retailer faced challenges with uncoordinated promotions and opaque pricing strategies, resulting in significant manual effort and missed revenue opportunities. By piloting AI-driven approaches in five product categories, the retailer saw a 3%-5% increase in sales revenue within the first year. This success was attributed to improved coordination between pricing and promotions, enhanced customer trust and better brand perception.
In the words of Fouche: “Leveraging AI and ML in retail and FMCG promotion strategies is not just about adopting technology, it's about creating a synergy between data, strategic goals and generating more free cashflow."
At TrueNorth Group, we are leaders in data and AI, delivering transformative outcomes for businesses across various industries, including FMCG and retail. Our expertise in data analytics, software development and digital enablement has consistently driven remarkable results. Our innovative solutions have enabled businesses to achieve significant margin increases of 3%-6%. We are eager to share these success stories and discuss how we can help optimise your performance and drive growth. Discover how TrueNorth Group can elevate your business at www.truenorthgroup.co.za.
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