Promotional Forecasting is Demand Forecasting
Ask a retailer where they are leaking (sales, profit, resources) and PROMOTIONS will nearly always be at the top of the list. Retailers admit a blind spot to selecting the right products for promotion, pricing the promotion to meet the goals, forecasting the correct amount of inventory to meet the promotions needs, executing the promotion in the stores and evaluating the promotion afterwards to learn how to improve in the future. —An alarmingly low number of retailers self-report that they do this well or consistently.
Executives usually overlook the critical FORECASTING component of promotional planning. Every other component is based on accurate forecasting. At its simplest level, here are the basic components for promotional forecasting:
DD = Deseasonalized Demand or moving average weekly sales without seasonality or promotional effects. The “clean” forecast. It should be updated weekly. For NEW ITEMS, it should be the average DD for other products int he category that share the same attributes. (For example, if a new scented candle comes on the market, the DD should be the average DD for all scented candles from that manufacturer that share the same price band until the new item has enough history to generate its own DD.)
BI = Base Index. The affect of seasonality, store openings and closings, category trends, consumer confidence and other larger market impacts that affect the sales of a product across the market. Some things affect all products across the entire chain – like store openings and closings. Others like weather conditions, new housing starts and fashion trends and fads may just impact certain categories.
PBI = Promotional Base Index. The expected impact of a particular promotion on a product or group of products based on the advertising, price reduction, in-store support, competitive marketplace, etc. This is where most buyers and retailers focus. But for many the science behind this forecast is not much different from a witch doctor reading chicken bones. Buyers and vendors are universally biased to be optimistic in the forecast. It is a rare retailer who uses a attributed promotional measurement system to create a PBI.