Usage and Promotions

Promotions are designed to increase sales of particular products over a short period of time. In order for predictions of future demand to be as accurate as possible, it is important both to include the anticipated effects of a particular promotion in calculating a demand forecast and to exclude the sales resulting from the promotion from usage history. Here is an outline of the procedures to follow in developing a system to monitor promotional activity:

1. Define the promotions that should be monitored. A promotion could be a temporary price reduction, special advertising, an associated giveaway, or some other strategy to increase sales. Note that a particular promotion can occur multiple times within a year.
   

   Event	Description
   Promotion-01	10% Discount
   Promotion-02	Advertising Flyer

2. Specify the beginning and ending month and day that sales will be affected by each occurrence of the promotion.
   

   Event	Start Day	End Day
   Promotion-01	January 1	January 14
   Promotion-02	February 7	February 10

3. After the promotion, calculate the sales per day (in units) of each item in the two weeks before the start of the event, the sales per day during the event, and the sales per day in the two weeks following the event.
   

   Event	Prior 2 Weeks Sales/Day	Event Sales/Day	Post 2 Weeks Sales/Day
   Promotion-01	82	104	74
   Promotion-02	74	86	70

4. With the information from step #3 above, calculate the percentage difference in sales between the period before the event and the period during the event as well as the difference in sales between the period before the event and the period after the event.
   

   Event	Prior- Event %	Prior- Post %
   Promotion-01	26.8%	-9.8%
   Promotion-02	16.2%	-5.4%

Why are we interested in what will happen to usage after the promotion has ended? Most promotions are followed by a “boomerang effect” or reduction in sales. After all, people considering buying the product probably purchased it during the promotion. In order for a promotion to be successful, the usage increase during the promotion must be greater than the boomerang effect after the promotion has ended. If it isn’t, you have only given away profit dollars or increased your costs without realizing higher sales.

Usage should be adjusted to take away the affects of the promotion because we cannot be sure that the same promotion will be offered at the same time each year. For example, we must adjust January’s usage to reduce usage per day by 26.8% for fourteen days (January 1 through January 14) and to increase usage by 9.8% for the seven days after Promotion-01 has ended.

Accumulated promotion history can help guide buyers and inventory planners as they anticipate what will happen to usage when the promotion is offered again in the future. For example, Promotion-01 has resulted in an increase in sales of 26.8%. When Promotion-01 is offered again, a buyer should consider increasing the results from the forecast demand formula by 26.8% to compensate for the anticipated additional sales. Over time, a buyer might adjust the results of the forecast formula by the average increase in sales resulting from this promotion.