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Making Sense

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Measuring retail success has always been fairly straightforward: Amass sales results for a certain period, such as weekly, monthly or quarterly, maybe do some comparisons with similar sales periods, and, presto, there’s a gauge of how well the company is doing.

But in today’s highly competitive selling environment where enticing consumers requires diligence and innovation, retailers are finding that their sales estimations and calculations demand more work.

Toronto-based department store chain Hudson’s Bay Company, one of Canada’s largest retail organizations, isn’t content to leave so much to chance when configuring sales outcomes. Hudson’s Bay, which also operates Home Outfitters, Lord & Taylor and recent acquisition Saks, is pushing aside the old models in favor of sophisticated, highly computational approaches to understanding the true impact of its marketing efforts.

Improving offer effectiveness
A significant approach to reaching consumers in Canada is advertising via printed flyers, despite the shift toward digital marketing. Hudson’s Bay needed to determine the true incremental return from sales on products its customers bought during a given period based on the enticements from the flyers, says vice president of marketing Ashley Whicher.

Working with analytics provider Saferock, the retailer began to analyze sales data on an item-by-item and offer-by-offer basis for products it advertised and sold from flyers distributed to customer households.

“We print millions of copies [of flyers] each year and make sure we distribute them into the markets and households where we know we have good customers,” Whicher says. But “it really isn’t customization. What we were looking for is a way to improve the efficiency and effectiveness of the offers that we put into our print pieces.”

The company needed to know sales results on non-advertised items, particularly understanding the sales variance in those items when they were later advertised or discounted. The process began simply by crunching data acquired over time on business operations. Whicher says analysis of this data gives the marketing team a gauge of baseline sales.

“You know intuitively that the sales you report on a weekly basis are never purely incremental,” he says. “Usually you take a hit in the margin when you off-price something.”

To build a baseline, Hudson’s Bay forwarded 18 months of SKU-level data to Saferock covering thousands of products in apparel, beauty, home goods and ladies’ footwear and accessories, as well as how specific items sold by store. Saferock developed an automated solution to analyze the sales patterns associated with each product and also analyzed Hudson’s Bay promotional plans, tracking sales by item and classification and how products performed when advertised and not advertised.

Calculating ROI
Delineating baseline sales in order to decipher incremental margins gives retailers a true measure of the return on their marketing investment, says Saferock CEO Shah Karim.

While the process Saferock developed is mathematically intensive, Karim says the approach is fairly basic — determining and understanding, for instance, what the marketing team gets for its spend. Each week Saferock analyzes Hudson’s Bay’s marketing data for the previous week, generating reports that analyze the printed offers based on performance by offer, incremental sales and incremental margins driven by the sales.

Karim notes that many of the Hudson’s Bay ads are promoted with numerous variables, such as pricing, history, overlap and seasonality. Simply running a promotion for 20 percent off women’s wear during a given period seems easy to analyze, but when considering the thousands of SKUs in the category, “It becomes a task that you cannot do on a spreadsheet or by hand,” Karim says.

“If I am going to determine the sales pattern of each of those SKUs in the ads, you can imagine how computationally intensive that is.”

In addition to the printed circulars, Saferock algorithms can help measure the effectiveness of direct mail and customer relationship management and online marketing programs.

Retailers need to understand, “If I can stretch one more dollar, am I going to get a dollar and 10 cents back or am I going to get 90 cents back?” Karim says.
“You need a very mathematically precise indication” of the projected return, he adds, likening the Saferock solution to consumers who might purchase a bank certificate of deposit. CDs come with varying vesting periods, such as one month, three months or six months, with each term determining the financial return.

Linking data with offers
Karim says while the retail environment typically has based business decisions on top-line sales, retailers will require more accurate accounting of sales as organizations grow and develop more sophisticated inventory systems.

“Retailers don’t look enough at margins because it is harder to do,” he says. “They definitely don’t pay attention the way they should to incremental margins.”

Breaking out incremental sales and margin amounts to “sales IQ” in order to measure gross profit, incremental sales lift and return on investment.

Saferock’s system “links sales and margin data with marketing offers to calculate ROI and ad lift,” Karim says. “The calculations are computationally intensive. The algorithms analyze millions of records to compute the most accurate baseline possible. The baselines are automatically adjusted for seasonality, holidays, fashion and changing assortments.”

Whicher says breaking down sales results gives the retailer increased flexibility in its marketing. “We may repeat an offer with a lower ROI to help drive traffic. If you know in advance, you can built it into your profitability model. Obviously you can’t have every order be low-ROI,” he says.

“It just helps us make sure we are investing dollars into businesses and offers that are going to help deliver for the company,” he says. “Do we need to cook the pricing and what do we need to do to just improve the overall methods of the return on our marketing dollars?”

Generating more specific sales results also takes some of the uncertainty out of retail marketing approaches, Whicher says.

“Marketing budgets are always challenged,” he says. “You ask how you can become more efficient and … more effective. More importantly, how do you reallocate money to do new things?

“The benefit is, this is on a weekly basis, on an offer-by-offer [basis],” he says. “We can ask, ‘Did this actually help improve our productivity and our performance?’”