Background and Challenge
A fashion retailer asked L.E.K. Consulting to help refine its promotional strategy. The client's promotional approach at the time of engagement was highly complex, with constantly changing deals and multiple layers of discounts. This made it difficult both for customers to understand the true price of an item, and for management to track changes in customer buying behavior. As a result, management feared that they were degrading margins without driving sales growth.
Approach and Recommendations
Over a four-month period, our team developed a Promotional Playbook that outlined actionable rules for designing promotions with a specific performance goal in mind (e.g. driving traffic, driving conversion, or basket-building) across key business dimensions:
- Time of Year and Day of Week: when to run certain promotions based on the elasticity of customer behavior
- In-Stores & Online: how to optimize promotions based on the different purchasing behavior of retail and ecommerce customers
- Product Categories: which product categories to promote, considering seasonal elasticity and bundling opportunities
- Promotion Type: what mechanism (e.g. % off, new price, buy-one-get-one, etc.) promotions should be designed to reach a given day's performance goal
- Customer Segment: who to target based on different consumers' elasticity to promotion types and depths
In order to inform our findings, we utilized our advanced analytics capabilities to run elasticity analyses, regressions, and product category association analysis to understand the effectiveness of promotions at the SKU-level and used a business intelligence tool to visualize key output. This evidence-based approach was critical to gaining alignment across the executive and leadership team to the new strategy.
The client realized significant benefit from our work, reporting sales and profit growth above analyst expectations, resulting in stock price appreciation of more than 20% upon announcement.