DEPTH OF PROMOTION
Definition
Promotional depth refers to the extent of the discount applied to a product during a promotion, typically expressed as a percentage discount relative to the regular price. For example, a 20% discount corresponds to a promotional depth of 20%. The greater the promotional depth, the greater the impact on sales volume, but the lower the unit margin.
Why it's important
- Finding the right balance between volume and margin: too little depth doesn't generate enough additional volume, while too much depth erodes the margin without increasing revenue.
- Adjusting for price elasticity: Inelastic products require moderate discounts (10–20%) to boost sales, while elastic products require significant discounts (30–50%) to have an impact.
- Distinguish between objectives: clearing inventory (high depth), driving traffic (moderate depth), testing a price (low depth).
A concrete example
A retailer is testing three different discount levels on the same product (an electric blender):
- Test A: -10% → Sales increase from 50 to 60 units per week (+20%). Gross margin: +5% because the increase in volume offsets the decrease in unit margin.
- Test B: -20% → Sales increase from 50 to 85 units per week (+70%). Gross margin: +15% (sweet spot).
- Test C: -30% → Sales increase from 50 to 100 units per week (+100%). Gross margin: -5% because the decline in unit margin is not offset.
Conclusion: The optimal depth for this product is 20%. Beyond that, value is lost.
How to optimize it
Use price elasticity: calculate the product’s price elasticity to estimate the impact of each stock level on sales volume. Then test 2–3 stock levels in real-world conditions (A/B testing or geographic testing) and compare the total gross margin generated. Choose the depth that maximizes gross margin, unless the goal is to clear inventory (in which case, prioritize volume).
Common Mistakes
- Uniform depth: Applying a 20% reduction to all products ignores their differences in elasticity. Customize the depth by category or product.
- Insufficient depth: a 5% reduction goes unnoticed and doesn’t add any extra volume. Start with at least 10–15% to achieve a visible effect.
- Over-discounting out of habit: “We always give a 30% discount on this product” is not a strategy. Try offering smaller discounts—you’ll be surprised by the results.
Learn more
- Research & Data: Price analysis to measure the price elasticity of your products and optimize your promotional discounts.
- Solutions: Promotion management to automatically test and control your inventory levels.
- Tip: Use operational pricing to train your teams on how to optimize promotional depth.
- Resources: Read our blog for case studies on promotional optimization.
Mini FAQ
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