How to determine which product groups need additional incentive discounts? How can I find out how effective the promotion was and does it make sense in the future to make a discount on this type of product? These questions are answered by Julia Veshnyakova, General Director of the Academy of Retail Technologies.
Company Academy of Retail Technologies - Consulting company focused on the fashion industry and on entrepreneurs of small and medium-sized businesses. Provides counseling and business training services.
What goods to sell at a discount?
To understand which product groups need operational sales promotion, you need to find out the rate of turnover of the store. The turnover rate is the number of days during which the product must be sold so that trading can be considered successful. The rate of turnover is calculated for each category of goods in the store, and this rate is individual for a particular store and cannot be borrowed from third-party businesses.
To focus on the rate of turnover, you need to know its ratio. It shows how long a given outlet has enough inventory for a given sales dynamics. To calculate the coefficient, you need to have data for a certain period, for example, for a week, on the average inventory and on turnover in cost prices. To get more objective data, use monetary and physical indicators. Make a table in Excel or Word and enter the numbers in it according to the following indicators: in the first line - inventory in units at the beginning of the week, inventory in units at the end of the week; in the second line - the same indicators, but in monetary terms. To calculate the turnover ratio, take the arithmetic average between the data for the beginning and the end of the week, multiply by 7 days (after all, we decided to calculate the indicator for the week) and divide by the turnover. You will receive a number equal to the number of days for which your product will be sold. Focus on this figure so as not to miss the moment when it becomes clear that the goods will not be sold for a certain period of time. If, as a result of weekly calculations, it becomes clear that the product is selling more slowly than you expected, you can make a discount offer on it.
Is the promotion effective?
To determine how effective a discount campaign has been, a method for measuring the elasticity of demand will help you. It makes sense to make a discount on a product only when the demand for it is elastic, in other words, when sales increase, if the price falls, or decrease when the price increases. Why is it worth selling out elastic goods? Because this way you can not only sell the surplus on the sale, but also earn.
To measure the elasticity of demand for a specific category of goods, use the formula ц = K / C, where K is the change in demand in percentage terms, and C is the change in price also in percentage terms. For example, you reduced the price of sandals by 30% and a week later calculated that the demand for these shoes increased by 32%. The elasticity of demand for sandals in this case will be 32 / 30 = 1,06. The coefficient is greater than unity, which means that demand is elastic. Conversely, if the discount on ankle boots amounted to 30%, and the demand grew only by 20%, the coefficient is 0,6, which means that the demand for these shoes is inelastic, and you won’t be able to earn something from selling ankle boots. You must either make the discount size larger, or choose a better time, or understand for what other reasons the discount does not work.
Pros and cons of the method
What’s good, we can use the demand elasticity indicator to determine whether revenue will increase the price reduction. In addition, with detailed statistics, we can even forecast our revenue. The disadvantage of this method is that calculations can be made only after at least a week of the promotion and calculations cannot be carried out with a completely new product. Also, elasticity does not take into account such important factors as the exclusivity of the product, the complexity of purchases, weather conditions and others.
Last couple of tips
Give a consistent discount on each item of the product so that they do not sell out at the same time. Also, do not discount only one article from several similar products, otherwise the discount model will spoil sales of non-discounted, but similar models of shoes.
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