How Retailers Can Break Away From “Unprofitable Promotion Activities”

Tempur Sealy CEO Scott Thompson had some choice words about former retail partner Mattress Firm’s sales practices recently. During a third quarter earnings call with analysts, Thompson noted that the retailer, which filed for bankruptcy last month, “continues what we consider to be unprofitable promotion activities including heavy discounts and free product offerings.” While Thompson’s comments were pointedly made about Mattress Firm, it is definitely not the only retailer that fits that description. In fact, the entire mattress retail industry has long relied on a regular promotional cycle of both discounts and free product offerings. Is it time to reconsider this approach?

There’s no doubt that the mattress industry has changed drastically over the years. The marketplace is increasingly crowded with new direct-to-consumer brands and low-cost online mattresses. And with dwindling foot traffic and more entry-level choices, retailers of all sizes have struggled to maintain their margins—many are looking for new strategies to remain competitive.

During that same call, Thompson offered some specific suggestions for how to move away from this practice. “In an environment where retail traffic is at a premium, retailers need to maximize the average ticket and that means premium product offerings,” he explained. “We see this all around the world. Successful retailers have to move high-end product. Low price, high volume does not generally work well in high-cost brick-and-mortar bedding retail.”

But simply swapping your product inventory to premium options only is not a realistic solution for many brick-and-mortar retailers. Nor will it guarantee better sales, especially as consumers continue to be conditioned to seek out more affordable mattress offerings.

What if retailers, instead, reexamined their promotion-heavy strategies? Research has, for years, shown clear deficiencies in this approach. According to a study from Boston Consulting Group, “20 to 50 percent of promotions generate no noticeable lift in sales—or, worse, have a negative impact.” That research went on to indicate that “another 20 to 30 percent [of promotions] dilute margins in that they don't generate an increase in sales sufficient to offset promotion costs.”

One possible reason for “unprofitable promotion activities” is the way in which these strategies have skewered consumers’ understanding of mattress pricing. If a retail store is regularly discounting its product line-up, it can be hard for consumers to gauge the true value of any mattress. In addition to making the purchasing process more opaque, this can also have a direct impact on sales. Revionics, a global SaaS provider of retail insights, recently commissioned a study from Forrester Consulting that explored the efficacy of retail promotions—and found that 59% of respondents said they “would refuse to purchase an item if they perceived the price as arbitrary.” By obscuring pricing rational, regular mattress promotions may have the unintended consequence of driving customers away.

Querying shoppers in the US, UK, France, Germany and Brazil, this new study also found that “52% of the weekly or monthly retail promotions go to customers who would happily have paid full price.” And of those respondents, 37% said those offers had a neutral or negative impact — with more than half of them saying they would be less likely to shop at that store in the future if they were annoyed by the messaging.

These discrepancies in goals versus results underscores key mistakes retailers make when launching new promotions. According to this article from BCG, the primary mistake is failing to create a promotion strategy that focuses on clear goals. What is the intended outcome of this particular promotion? The most common objective for any promotion is to generate greater incremental sales, but there are plenty of other goals they can achieve - including improving margins, driving in-store traffic, bolstering customer loyalty and enhancing brand awareness. By exploring different objectives and zeroing in on just one at a time, retailers create a more efficient program that can be more easily analyzed.

The second mistake many retailers make is not having the proper systems in place to track and evaluate the program’s performance. As BCG explained, “to select effective promotions, companies need to put in place big-data capabilities that enable them to gather comprehensive information about promotions.” By investing in more in-depth performance reporting, retailers can then fine-tune new promotion strategies instead of simply re-using the same approach they’ve had year after year.

Of course, not all promotions are the same. In the mattress market, most retailers rely on price-cut deals. But according to Theresa McEndree, the vice president of marketing for Hawk Incentives, discount-based promotions are less effective than their reward-based counterparts.

Instead of offering a limited time price reduction at the point of purchase, rewards programs provide other incentives for consumers to make a purchase at full price. While they can take on many different forms, rewards programs, at their core, give customers exclusive discounts or perks in exchange for buying regularly. Research has found that rewards programs generate more annual revenue for the retailer: companies offering rewards see an average of eight percent higher year-over-year revenue growth than those offering discounts. They also increase the per-customer profitability; retailers offering rewards-based promotions see on average a six percent greater profit margin per customer than those offering discounts. Even more, rewards programs were also shown to boost customer retention and loyalty. Though discounts are often swiftly forgotten after the purchase has been made, reward promotions create a more positive impression of the brand among consumers that lasts over time.

While many retail stores have long been offering their customers tiered programs, merchant credit cards and special events, new research has shown that these are not the most effective type of rewards programs for today’s consumers. A new report titled “Dosh Consumer Loyalty Survey” explains how traditional rewards programs often lack “concrete value and immediacy.” In order to connect with younger customers, programs that offer cold, hard cash back are the way to go. “Eighty-three of respondents said cash makes them feel rewarded, and at least one in three respondents said that they would switch to a merchant that provides cash back over one that does not.”

Of course, the very concept of a rewards programs may seem tricky for sleep retailers, as mattresses are not a frequent repeat purchase. But, thankfully, consumer interests and buying habits are shifting. Many of today’s shoppers are on the look-out for the newest ways to improve their health and wellness, which opens up more opportunities for bedding retailers to engage with them more regularly through inventive non-mattress add-on products. By touting everything from new top-of-bed accessories to upgradable under-the-bed support, sleep retailers now have the chance to support their customers in creating a more tranquil and relaxing sleep environment. Taking the role of educator is another approach we’ve seen: a number of manufacturers have recently developed new ongoing sleep and wellness coaching services.

By not only offering products and services that bring customers in more regularly, but creating a rewards program promotion that supports regular purchasing, retailers have a real chance to boost their profitability. While there’s no doubt that it will be difficult for the mattress retail industry to break away from its reliance on promotions, doing so may be the key to new financial success in the future.

Read more here, here, here, here and here.

This article originally appeared in Sleep Retailer eNews on November 8, 2018

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