Promotion Profitability for a Retailer: The Role of Promotion, Brand, Category, and Store Characteristics

Abstract

The purpose of this article is to quantify the net unit and net profit impact of promotions for a retailer and to understand the key correlates of this impact. Using data on all promotions offered in 2003 by CVS, a leading U.S. drug retailer, the authors (1) quantify the gross promotional lift; (2) decompose this into switching, stockpiling, and incremental lift for the retailer; (3) estimate the extent to which promotion affects sales of other product categories in the store to compute the net unit impact of the promotion; (4) account for promotional and nonpromotional margins and manufacturer funding to compute the net profit impact of the promotion; and (5) examine how promotion, brand, category, and store characteristics influence the net impact. The authors find that approximately 45% of the gross lift is incremental for CVS, and there is also a significant, positive halo effect on sales of other categories. However, on average, the net profit impact of promotions is negative because CVS's promotional margin is often substantially less than regular margin. In the authors' analysis of the correlates of net impact, they find that many promotion and brand characteristics have opposing associations with net unit and net profit impact. Deep, featured promotions on high “consumer-pull” brands generate high net unit impact, but they significantly reduce CVS's promotional margin, resulting in lower net profit impact. Therefore, the retailer must make some difficult trade-offs between revenue and profit objectives in promotion decisions.