Tag: marketing
Connect With Us
Are Your Promotions Increasing Basket Size or Just Discounting Items
Are your promotions increasing basket size or just discounting items that your customers would have bought anyway! I just talked to an old friend, who is now CEO of a convenience store chain. He told me that they had completed a marketing program and he suspects that he just ended up discounting stuff that customers were going to buy anyway!
Currently the retail industry invests four to six percent of its revenue on marketing programs, and promotions. With that size of spend, C-level execs are rightfully asking - Are the promotions and programs working? Are we creating programs on items that will cause maximum sales lift? OR are the promotions just discounting items that customers would buy anyway? (“Let’s buy just the drink, it’s on sale!”)
Leverage Product Affinities To Create Promotions That Increase Basket Size
With limited marketing dollars and a desire to see real ROI, these are very important questions for effective promotions. All items in a store are linked by affinities. Leveraging the product affinities can drive higher success rate in your marketing programs as it aligns with customer buying patterns.
Items with very high volume sales occur in a large number of transactions. This creates a lot of noise and leads marketers to believe that these items can drive sales increase. For example – in a convenience store, drinks are big sellers. However, promotions on drinks will typically just end up discounting drinks! The good candidates for promotions tend to be far lower on the sales popularity chain. While lower in sales, they have higher ‘basket size’. This means that they occur in transactions with more items. Promotions on items with higher basket size causes sales lift, as these items drag along sales of items with affinities.
So – the next time you are creating a marketing program, ask yourself – ‘what is the average basket size for these items? Am I going to lift sales or just discount stuff that they are going to buy anyway!”
Q&A with John Sloan, former director, Jeep Brand Global Product Marketing
In today’s post, John Sloan talks about challenges dealers face in ordering inventory that best matches customer demand.
Emcien: Describe the Chrysler-Emcien initiative that examined dealers’ struggles with complexity in the ordering process.
JS: In a soft “push” market where volume is driven by heavy incentives versus the merits of the brand / model, managing cost is paramount. A key piece to focus on is product inventory. Dealers get roughly 60 days of no-interest floor plan. In a soft market, vehicles can easily sit for longer than two months before being sold, so it’s critical that vehicles be easy to order, stock and sell. Simple is better.
Emcien worked on a model to simplify the Chrysler PT Cruiser product mix. There were thousands of possible build configurations for the PT Cruiser, creating significant complexity for engineering and the assembly plant, as well as the supplier extended enterprise. Emcien’s ability to accurately forecast demand is invaluable for a complicated product line because it can assist with reducing the build configurations to those that best match demand. The PT Cruiser initiative validated the power of the Emcien inventory model.
Q&A with Mark Gottfredson, Bain & Company
In today’s post, we talk to Mark Gottfredson about product complexity and customer choice.
Emcien: It’s natural for companies to add products and features to keep customers happy. What are the downfalls?
MG: The challenge of adding complexity is it’s the most natural thing in the world. Marketing comes up with new ideas for products or configurations to get the next bit of market share or a little bit more share of wallet. But most companies aren’t so good at retiring products; they don’t have a similarly robust process for taking things out of the catalog that no longer sell, or sell only small amounts. They don’t do a good job of balancing.
Most decisions we make are based on incremental economics. Each decision makes sense in its own right, but the costs of complexity tend to grow systemically. You can’t tie them to a single product decision. Take tinted windshields, for example, that you can sell as an option for $120 and 40% of customers will buy. Assuming the costs of tinting the windshield including inventory impacts, etc., are $9, it will always make sense to add the option. By itself, it is a rational decision, but when coupled with hundreds of other decisions, we end up with dozens of options like power windows, 13 exterior colors, 10 interior colors, 7 different radio and speaker combinations, etc. Eventually, the vehicle can be made in 10 billion different ways, and you don’t know what the next order will be. Since you can’t effectively forecast anymore, you get frustrated and buy a $50 million forecasting module to try to manage all the complexity. You have difficulty balancing your lines, build inventory and increase supply chain costs. Unfortunately, when most companies finally decide to reduce complexity, they “cut off the tail” of low-running options or SKUs. But they don’t remove the systemic costs, and they don’t see any benefits.
Emcien: Companies often overestimate the value buyers place on having many choices. What are the downsides?
MG: Go to a banking website like Citibank or Bank of America. The site describes itself as a full-service bank that has all the items you could want. There are long lists of products like credit cards with different reward programs, as if to say, “We have a lot of products. Surely there’s one here for you. Good luck finding it.” High complexity is a priori evidence that you don’t know what your customers want.
Emcien: When do fewer choices mean higher sales?
MG: When you understand customers. Dell understands customers well. Dell’s website is Spartan; there are just a few choices. If you choose a desktop, up pops three computers: high, medium and low cost. These three configurations are what your segment – home, professional, government – wants. You can customize each one, but you’ll make it as expensive as the next higher model, so then you switch to that and you’re still buying a standard configuration. Every time I have seen complexity reduction done right, sales have increased.
Emcien: How do overoptimistic sales expectations help to spread complexity?
MG: What happens is sales looks for a gimmick that gets them the next sale. Many manufacturers think whatever’s thrown over the wall from product management and sales must be good to go. And sales thinks more is better! Engineers love to engineer; they’ll give you complexity. Most firms build complexity systematically into operations, and then they build systems to handle the complexity, and that’s high cost.
Companies should think about what business would be like with a zero-complexity baseline – how they would operate if they offered just one product or service. The purpose of zero-based thinking isn’t to eradicate complexity; it’s an exercise to reimagine the business with the optimum amount of complexity.
Mark Gottfredson is a director of Bain & Company’s office in Dallas, Texas, which he founded in 1990. Over the past 26 years, he has advised chief executives and top-level managers in a wide range of industries. Currently, he serves as the Global Head of Bain’s Performance Improvement Practice and is also a leader in the firm’s business strategy, airline, financial services, manufacturing and energy practices.
Comments Off
Customer power
What if you could reduce the cost of marketing while giving customers better access to what they really want? Consumer empowerment requires that companies give up some control over product access, promotions and price in exchange for increased consumer responsiveness. See this Q&A with professor Luc Wathieu, Harvard Business School.
Comments Off
The quality connection
Recently I wrote about quality rankings for automotive manufacturers and the perception of these rankings in the market. While the marketing teams at these companies must shoulder the burden to convince consumers about their products’ quality, there is a very real connection between product quality and configuration management.
In many industries where products have grown over time with constant additions of new features and flexibility to allow customers to build to order, the level of complexity is staggering. Often the number of configurations sold on an annual basis is surprisingly close to the total units sold for that same period. This “snowflake” situation is one of the worst possible scenarios in product complexity as each unit has its own signature. Obviously, the production of these products also requires flexibility in manufacturing. This may result in reduced use of automation, and often it leads to units being reconfigured where components installed during one step are either removed or modified in a later step due to a unique situation.
These one-off manufacturing processes open the door for product quality issues due to fewer controls during production. Put simply, if I can reduce the number of different things that must be done during production I should be able to do those things better.
So product management teams have direct input on product quality via product complexity. Managing the product option mix to reduce the overall number of configurations can promote the increased quality that all manufacturers are looking for.
Comments Off
Optimization is the big win – but getting started is key
When I started studying complexity and realized the huge adverse impact it was having on companies, I was determined to “find it and get rid of it.” There are many places where that formula will lead to big improvements in everything – profits, service, quality and more. More and more companies are discovering how to do this. In some cases it is pretty simple. Just having the courage of their convictions that it will make things better is all that stands in the way of eliminating complexity.
Well, I found that is not completely true – at least not all the time. There are some situations where what seems to be a simple complexity elimination process turns out to be quite a bit more… complex! The real issue is not just complexity reduction. It is “optimization” of complexity. Get rid of the wasteful part and structure processes to use the right level of complexity.
Why product complexity matters
I was telling some friends at a brunch about what I do, and how variety drives cost in manufacturing. “But all the manufacturing has moved to China,” commented one person. I’ve heard this comment over and over.
A picture is worth a thousand words — and here’s one that fits the bill.
- Commoditization of labor in manufacturing
- Higher output per worker
- The percentage of cost in goods is much higher
