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Promotional Planning: 3 Things To Keep In Mind

In this blog, we will discuss the role of demand forecasting in effective promotion planning and the significance of promotions in driving demand. We will discuss best practices in forecasting promotions and strategies for managing promotional demand spikes. It'll help you to maximize your promotions' effectiveness and increase your bottom line by the end of this blog.

Feb 21, 2023
15 minutes to read

What's in this article:

  • Promotions and Demand Forecasting: Unlocking Their Potential
  • The Importance of Accurate Demand Forecasting
  • Best Practices for Forecasting Promotions
  • Strategies for Managing Promotional Surges in Demand
  • Key to Effective Promotional Tracking: Assigning a Unique SKU

Commonly used by businesses to increase demand for their goods and services, sales promotions are a form of marketing strategy. These promotions can take various forms, including discounts, coupons, gifts, and contests. While sales promotions can be effective at increasing revenue, they can also have a significant impact on demand forecasting. When a business runs a promotion, it can be challenging for the supply chain to forecast how many customers will take advantage of the offer and how it will impact future sales. Thus, demand forecasting becomes an essential tool for businesses to manage their inventory and production, particularly during increased promotional activity or for companies that rely heavily on promotions.

Demand forecasting tries to predict the future demand for a product or service. It is the starting point of an effective supply chain and helps companies plan for future procurements, production, and sales requirements. For businesses that rely on promotion-based selling, demand forecasting enables businesses to anticipate the effect of a promotion on demand and make the necessary adjustments. By accurately predicting demand, companies can increase the impact of promotions many folds. It helps avoid stock-outs, reduce overstocking, and maintain an efficient supply chain, giving the organization a competitive edge.

In this blog, we will discuss the role of demand forecasting in effective promotion planning and the significance of promotions in driving demand. We will discuss best practices in forecasting promotions and strategies for managing promotional demand spikes. It'll help you to maximize your promotions' effectiveness and increase your bottom line by the end of this blog.

The Importance of Accurate Demand Forecasting

Accurate demand forecasting is essential to the success of any business. It becomes more critical and complex, especially when promotions are involved. Inaccurate demand forecasting can devastate a company's supply chain and profitability.

Forecasting for the business with promotions can become a double-edged sword if not done correctly. For example, if a company under-forecasts, stock-outs can occur, and the promotion can fizzle out, resulting in dissatisfied customers who can't take the benefits of the promotions. Such an event can tarnish the brand value in the long run and impact the revenue.

Moreover, promotions can lead to revenue cannibalization, or even product cannibalization, if it involves products that can serve as substitutes. While this effect is almost unavoidable to a certain extend, it should be accounted for in the forecast and optimized through scenario analysis planning.

In contrast, over-forecasting can lead to fewer sales despite promotions, resulting in overstocking, increasing inventory carrying costs, affected cash flows, and the risk of obsolescence. The supply chain becomes inefficient in both situations, and the bottom line suffers. There is a lot that new-age forecasting tools do to help overcome these challenges. But let's look at the best practices for forecasting promotions.

Best Practices for Forecasting Promotions

Demand forecasting is a mix of art and science. When done correctly, it can help the companies create a supply chain moat that is very hard for the competition to beat. To achieve accurate demand forecasting for promotions, it is necessary to adhere to best practices and employ various techniques. Here are some critical elements to consider when predicting promotions:

  1. Utilize Historical Data: Historical sales data can provide valuable insight into how a product or service responded to previous promotions. This data can support future promotions forecasting and serve as a baseline for demand projections. If the product being forecasted doesn't have a sales promotion history, then a near-match product or the category's history can be considered. But the accuracy will be low in this case, and such a forecast should be reviewed at a much higher frequency. In such cases, the following forecasting elements can help to build a better forecast.

  1. Market Research: For products with a limited data history, promo forecasting can be done by conducting market research to comprehend consumer behavior and market trends. Businesses can predict the impact of a promotion on demand if they understand consumer preferences and purchasing patterns. In this case, the promotion can be done in smaller markets to understand the impact and then taken to wider markets.

  1. Promotional Variables: When forecasting demand, it is essential to consider the promotion's discount level, duration, and timing. These factors can act as levers for changing the volume forecast. The more information a company has about the particulars of a promotion, the more accurate its demand forecast will be.

  1. S&OP Alignment of Promo Calendar: In the Sales and Operations Planning (S&OP) or Integrated Business Planning (IBP) process, aligning promotional plans with all stakeholders is essential. This ensures that all stakeholders, like supply chain, manufacturing, and warehousing, are aware. They should know the effect a promotion will have on demand and can make the necessary preparations. Please align with all stakeholders to avoid stock-outs and hinder the success of a promotion.

By adhering to these best practices for promotion forecasting, businesses can make more accurate demand projections and ensure the success of their promotions. Incorporating historical data, market research, and promotional variables into the forecasting process will assist businesses in preparing for the impact of promotions and ensuring supply chain efficiency.

Strategies for Managing Promotional Surges in Demand

With the rise of e-commerce and increased competition, promotions have become a vital tool for businesses to increase sales and maintain a competitive edge. Not all promotions can be planned in advance or forecasted accurately. Such unforecasted and untimed promotions can pose significant challenges for the supply chain, particularly in meeting increased demand. Hence, how can businesses effectively manage promotional demand spikes? Here are some fundamental yet strategic supply chain-level changes the company can plan.

  1. Flexible Supply Chain: Managing sudden or unforecasted promotions require a flexible supply chain that can quickly react to changes in demand. Quickly increasing or reducing production and distribution in response to fluctuations in demand is crucial for ensuring that while the demand can be met as per the promotion's performance, it doesn't hurt the company. The downside of such a quick response time is that the unit economics of the production can be impacted, leading to a higher per-unit cost.

  1. Safety Stock and Buffer Inventory: Utilizing safety stock and buffer inventory can reduce the risks associated with promotions. By maintaining a higher safety stock, businesses can ensure sufficient supply to meet demand, even in the event of unanticipated demand spikes. Here the downside is that the carrying cost increases with the higher inventory, impacting the unit economics.

  1. Collaboration: Sales, marketing, and supply chain teams must collaborate to manage promotions effectively. When all parties collaborate and clearly understand how a promotion will affect demand, the supply chain operates more efficiently, and the promotion is more likely to be successful. S&OP forums must regularly publish the promotion forecasting trends and work collaboratively to improve them.

  1. Invest in Supply Chain Technology: Investments in modern supply chain analytics tools can also be crucial in assisting businesses with better promotion planning. These tools can provide real-time visibility into demand and inventory levels, enabling companies to respond swiftly to demand fluctuations and maintain a streamlined supply chain.

At Ikigai Labs, we provide supply chain optimization solutions to assist businesses in overcoming these supply chain and demand forecasting obstacles and achieving success. If you are interested in enhancing your supply chain, we invite you to learn more about our services and how we can assist you.

So while all these strategies help to fundamentally shape the supply chain to be more effective in handling promotions, the promotion effectiveness should be tracked from the supply chain as a KPI. Let's discuss how this should be done.

Key to Effective Promotional Tracking: Assigning a Unique SKU

Promotions play a vital role in driving demand and increasing sales, but without proper tracking and monitoring, measuring the impact of these promotions can be challenging. This is important to repeat the success and learn from the failure of each promotion.

One practical and straightforward way to do this is to have each promotional product as a unique stock-keeping unit (SKU). This small step will enable you to accurately track the performance of each promotion and make informed decisions regarding future promotions. It will help segregate the promos from the baseline forecast.

One of the most challenging aspects of evaluating a promotion's success is isolating the promotion's impact from other variables that can affect demand, such as seasonality or changes in consumer behavior. By assigning promotional products a unique SKU, you can isolate the impact of the promotion and measure its success with precision. This will also help to understand the product's lifecycle without promotions, like whether the base is increasing or reducing. Such analysis can help make critical future sales and marketing action plans.

Also, it is essential to monitor promotional consumer uptake to make the most of this information. This should be performed daily or at most once per week, so you have sufficient time to respond to changes in demand. By comparing the actual promotional response to your projections, you can quickly identify discrepancies and adjust your promotional strategies as necessary.

Finally, it is essential to resist the temptation to view promotions as a quick fix for growth. While promotions can certainly increase demand and sales in the short term, they should not be relied on to meet growth objectives or compensate for deficiencies in other areas of your business. Instead, you should integrate promotions into your overall strategic plan and use them to drive incremental growth on top of organic growth. By avoiding a race to the bottom, you can preserve the value of your brand and protect your profit margins.

By adhering to these best practices, you can effectively manage the risks associated with promotions and reap their numerous benefits. Ikigai Labs, a leader in supply chain analytics and optimization, is an excellent resource for learning more about optimizing your supply chain.

In this article:


Team Ikigai

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