Quantifying and Improving Promotion

Effectiveness at CVS

Kusum Ailawadi
Bari Harlam
Jacques Cesar
David Trounce

2005 ISMS Practice Prize Competition

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CVS

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 Project Motivation

 Mass Merchants continue to take share from Chain Drug

 $.72 of every $1 spent on HBA in Texas is in Mass.

 Excessive Hi-Low Strategy leads to “insult” price positions

 Cutting promotional spend dramatically does not work (e.g.

Safeway, Kmart)

 promotional customers lost before price shoppers gained

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 CVS Strategy
Promo Promo
Pro Pro
mo mo

Pricing

Current Future

Step 1: Quantify net sales and margin impact of promotions

Step 2: Understand the determinants of promotion effectiveness
Step 3: Identify and modify “unproductive” promotions
Step 4: Reinvest in better price position company wide 4
 Overall Promotion Plan Performance
Cumulative net sales and margin impact of promotions
Categories ordered by sales multiple, FY2003
Sales
Sales multiple: 2
multiple:10 Sales
multiple: 3
Sales
multiple: 5
Sales
multiple: 1
Net margin Impact
($m)

Net sales Impact ($m)

Key Challenge: To invest with confidence by identifying

factors driving promotion impact
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 Research Overview
• Quantify lift for each 2003 promotion.
• Decompose into switching, stockpiling, primary demand,
and estimate “halo”.
• Compute net unit, dollar sales, and margin impact.

• Conduct a meta-analysis with promotion, brand, category,

and market factors.
• Identify most “unproductive” categories.

• Test sales and margin impact of elimination in field test.

• Implement successfully tested changes chain wide.
• Continue analysis and testing.
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 Data

 ≈ 37 million promotion events

 ≈ 3800 stores

 ≈ 180 categories

 Five departments (health, beauty, edibles, general

merchandise, photo)

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 POS Panel

Margins Promotion Database Market

Funding Perceptions

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 Method
 Baseline for each item-store event = Average weekly sales in t ± x
non-promotional weeks.

 Random effects model for switching in each category-store:

Unit Salescst = â 0cs + â cs ! Promotional Lift icst + å cst
i"c

 Comparison of next purchase by matched promo and non-promo

buyers for stockpiling in each category.

 Halo in each department:

Unit Salesst = â 0 + !5d =1 â d ! Promotional Lift ist + åst
i"d
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 Net Sales Impact

(Promo units x Promo price) - (Baseline units x Base price)

- (% switch x Unit lift x Reg. category price)
- (% stockpile x Unit lift x Avg. category price)
+ (% halo x Unit lift x Avg. store price)

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 Net Margin Impact

Promo units x (Promo price – Vendor price – ABC + Vendor fund)

- Base units x ( Base price – Vendor price – ABC)

- (% switch x Unit lift x Reg. cat. price x Reg. cat. % margin)

- (% stockpile x Unit lift x Cat. price x Cat. % margin)
+ ( %halo x Unit lift x Store price x Store % margin)

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Results

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 Promotional Lift: Overview

Full Health Beauty Edibles Gen.

Sample Merch.
Promotional Discount
Median 30.0% 26.5% 28.6% 33.6% 33.6%

Promotional Lift
Median 410% 364% 414% 408% 521%

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 Immediate Lift: Highlights
 Smaller lift for private label, frequently promoted brands, low
share brands.

 Smaller lift for heavily advertised, concentrated, low

distribution, need-based categories.

 Higher lift for seniors, college educated, 1-worker, lower-

income, larger households.

 Lower lift where competition is strong. But, opposite with

drug competition.

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 Lift Components: Overview
Full Health Beauty Edibles Gen.
Sample Merch.

Switching
Median 46.1% 49.7% 47.0% 39.8% 42.8%

Stockpiling
Median 10.2% 10.8% 9.0% 15.3% 7.7%

Halo Rate
Median 0.225 0.248 0.565 0.169 0.149

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Switching, Stockpiling & Halo: Highlights

 Less switching and more stockpiling for frequently purchased,

heavily advertised, featured, deeply discounted, categories.

 Less switching in high purchase amount, widely distributed,

storable categories.

 Significant halo effect, strongest in categories closely

associated with drug channel – beauty and health.

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 Net Impact: Overview
Variable Full Health Beauty Edibles Gen.
Sample Merch.
Net Unit Impact
Median 1.46 1.13 1.80 2.31 1.41
Median baseline units 0.86 0.80 0.67 2.00 0.75
Net Dollar Sales Impact
Median 2.46 1.25 4.48 2.65 1.98
Median baseline $ sales 3.86 4.79 3.20 4.15 2.62

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 Net Impact: Overview
Variable Full Health Beauty Edibles Gen.
Sample Merch.

Net Unit Impact

Median 1.46 1.13 1.80 2.31 1.41
Median baseline units 0.86 0.80 0.67 2.00 0.75
Net Dollar Sales Impact
Median 2.46 1.25 4.48 2.65 1.98
Median baseline $ sales 3.86 4.79 3.20 4.15 2.62
Net Margin Impact
Median -0.33 -0.93 0.72 -0.70 -0.25
Median baseline margin 1.29 1.69 1.24 0.91 0.94

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 Unit Versus Margin Impact
Correlate Dependent Variable: Change in
Net units Net $ Net margin
sales

Promotion Characteristics
Discount depth + - -
Front page feature + + -
BOGO - + +
Brand Characteristics
Unit share + + +
Promotion frequency - - -
Relative price - + +
Share of cat. advtg + + -
Private label - - +

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Promo units x (Promo price – Vendor price – ABC(% switch x Unit
+ Vendor lift x Reg. cat. price x Reg. cat. % margin)
funding)
Unit Versus Margin Impact
+ (% stockpile x Unit lift x Cat. price x Cat. % margin)
- Base units x ( Base price – Vendor price – ABC)
- ( % halo x Unit lift x Store price x Store % margin)

Correlate Dependent Variable: Change in

Net units Net $ sales Direct margin Non- Net margin
(part 1) increment (part1-part2)
(part 2)

Promotion Characteristics
Discount depth + - - + -
Front page feature + + - + -
BOGO - + + - +
Brand Characteristics
Unit share + + + + +
Promotion frequency - - - - -
Relative price - + + + +
Share of category advtg + + - - -
Private label - - + - +

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 Key Take-Aways
 Switching is less than 50% of the unit lift and stockpiling is
about 10%.
 Halo is significant – for a unit increase in beauty promotional
lift, sales elsewhere in the store go up by 0.56 units.
 Still, more than half of all promotions have negative margin
impact.
 Many promotion and brand characteristics increase net unit lift
but decrease net margin lift.
 Direct margin lift is as important as non-incremental portion of
promotion lift.
 Eliminating promotions on a small % of categories does not
hurt net sales significantly but substantially improves margin.

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 Quick Hits by Department
FY2003 Distribution of Quick Hits Categories and Impact

100%
Dept #1
80% Dept #2

Dept #3
60%
Dept #4

40%

20%

0%
Share of QH Subcategories Share of Margin Impact

Analysis suggests reducing promotional spend

for 9% of Front Store Categories 22
 Field Test
Conducted Q4 2004

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 Test Configuration

5 PET markets
‘Pure Test’ ‘Mitigated Test’
Market 1 Market 2 Market 3 Market 4 Market 5

Test 57 comp 57 comp 123 comp 99 comp 168 comp

stores stores stores stores stores

Control 738 DS 469 MS 448 MW 751 NE 751 NE

(excluding test comp stores comp stores comp stores comp stores comp stores
markets)

Circular reduction Circular reduction with

only ExtraCare offers

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Ad Examples

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Ad Examples

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 Expectation based on analysis

Units Sales ($) Margin ($)


– 

Lose small But discount is … and strongly

amount of smaller so margin positive
volume from ultimately sales
promotion cuts neutral…

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Chain Wide Projections: Quick Hits
Category Category Company Company
Category Sales Margin Sales Margin

Category 1 ($3.0m) $8.4m $0.9m $12.5m

Category 2 ($0.9m) $5.5m $2.5m $8.2m
Category 3 ($5.7m) $2.7m ($2.9m) $5.4m
Category 4 ($1.9m) $4.0m ($1.0m) $6.2m
Category 5 ($0.2m) $2.6m $0.6m $3.5m
Category 6 ($1.9m) $1.1m ($1.4m) $2.0m
Category 7 ($0.3m) $1.6m ($0.4m) $2.1m
Category 8 ($6.2m) $2.6m ($4.0m) $5.8m
Category 9 ($3.1m) $4.5m ($1.6m) $6.9m
Category 10 ($0.8m) ($0.3m) ($0.6m) $0.0m

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Chain Wide Projections: Quick Hits
Category Category Company Company
Category Sales Margin Sales Margin

Category 1 ($3.0m) $8.4m $0.9m $12.5m

Category 2 ($0.9m) $5.5m $2.5m $8.2m
Category 3 ($5.7m) $2.7m ($2.9m) $5.4m
Category 4 ($1.9m) $4.0m ($1.0m) $6.2m
Category 5 ($0.2m) $2.6m $0.6m $3.5m
Category 6 ($1.9m) $1.1m ($1.4m) $2.0m
Category 7 ($0.3m) $1.6m ($0.4m) $2.1m
Category 8 ($6.2m) $2.6m ($4.0m) $5.8m
Category 9 ($3.1m) $4.5m ($1.6m) $6.9m
Category 10 ($0.8m) ($0.3m) ($0.6m) $0.0m

Total ($24.1m) $32.7m ($7.8m) $52.6m

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 The Impact

Sales Margin

($7.8 mill) $52.6 mill

On sales of $9 billion
and net margin impact of -25 million
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 Impact on CVS
 Surprise lessons about promotion effectiveness:
 Some promotions generate so little in net sales
 Promotions are least effective for health categories
 Halo is quantified
 It is much bigger for beauty than for health
 Can cut promotions in a portion of categories without
serious sales impact

 Financial impact
 “$53 million in margin is the equivalent of a quarter of a
billion in new business for CVS”
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 Impact on CVS

 Understanding of the net impact of promotions, and why it

varies.

 Willingness to even test the elimination of some promotions.

 Chain-wide implementation.

 And testing further modifications.

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 The Process in Perspective
Recognition of
price perceptions √
Quantification of
promotion impact √
Identification & testing
of quick hits √
Chain wide
implementation
√

Chain wide acceptance

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