Business Tip 25
Understanding Merchandising Efficiency

The Basics
What it means and why you need to know.
Merchandising Efficiency (or promotion efficiency) is a measure that attempts to quantify the real impact of merchandising conditions on a retailer's bottom line. Instead of simply looking at the bump in sales, or lift, that a promotion creates, this measure compares that bump to the amount of merchandising dollars spent to create it. The result is a gauge of the merchandising condition's impact on driving incremental business versus its relative cost.

To truly understand merchandising efficiency, you must first understand the following prerequisites:

1. Base Sales
2. Incremental Sales
3. Merchandised Sales

In Action
How XP3 addresses the challenge.

Chart A

• Base Sales are the estimated sales that a given product in a given retailer would have sold in the absence of any merchandising conditions. In the example above, it's estimated that the retailer would have sold just over $6M of Cranberry Sauce in any week.
• Incremental Sales are the additional sales beyond the estimated baseline that occurred as a result of some merchandising activity. For instance, in the few weeks prior to Thanksgiving, the retailer may have run print advertisements for Cranberry Sauce, thus causing the sales to spike.

Chart B

• Merchandised Sales are ANY sales that have a merchandising condition. In the example above, you'll notice that the merchandised sales generally extend beyond the incremental, and into the base. This is normal and caused by the fact that some customers who would have bought the merchandised product in the absence of promotion happened to buy the product while the retailer was running a promotion. Since merchandising does cost money, you should aim to minimize this overlap to maintain healthy margins.

Chart C

Merchandising Efficiency is the ratio of % promoted to % incremental dollars. In essence, it measures how many promoted dollars become incremental (or drive new sales) vs. how many promoted dollars are wasted on base sales (or sales you would have captured anyway). In the chart above, you'll notice that the greater the overlap of merchandised and base dollars, the less efficient the merchandising. This makes sense logically, since those merchandised dollars have been less effective at driving incremental volume.

Maximizing Merchandising Efficiency
In practice, finding the right mix of merchandising conditions and timing for those conditions can be a challenging prospect. Using a tool like XP3 in conjunction with either syndicated data or statistical modeling software to create a sales baseline can make this process much easier.

Systematically benchmarking the conditions used by your competition and peers versus their respective efficiency numbers is a good place to start. From there, it is a matter of drilling into the data to identify the right opportunity to merchandise and whether those opportunities fit your overall strategy. XP3 can help you create the metrics of merchandising efficiency and automate its analysis in product and retail specific scenarios.

The data, products and accounts depicted in this example are fictitious. Any resemblance to actual data, products or accounts is purely coincidental.