“Quantifying and Improving Promotion Profitability at CVS” by Kusum Ailawadi, Jacques Cesar, Bari Harlam, David Trounce.
Like many high-low retailers, CVS (a leading U.S. drug retail chain) makes approximately 30% of its sales on some kind of consumer promotion. However, a large proportion of these promotions are not profitable. In this large-scale study of promotion effectiveness we (1) decompose the immediate sales bump of each promotion offered by CVS during the year 2003 in any of its 4,400 stores into switching, stockpiling, and primary demand components and estimate its net sales and margin impact, and (2) relate this impact to a wide range of promotion, brand, category, and market characteristics to understand how promotion effectiveness varies with these characteristics, so that this analysis could be used as an input to decisions about which brands and categories to promote, how much, and in which markets. To validate the work, the authors ran a field test to assess the sales and margin impact of discontinuing promotions in 15 product categories that showed that promotions consistently have negative margin impact and only a small positive net sales impact. A projection of the results from the 13-week test in 350 stores to a chain wide 52-week period show a net sales loss of $7.8 million, which is less than 0.1% of total revenue, but a net margin gain of $52.6 million, which is highly significant for the company. CVS is now implementing these changes chain wide and investing the margin savings in resetting its everyday prices.