One of the advantages of having an analyst coverage area that is focused on execution that surrounds a customer (rather than a functional area) is the ability to bring together functional capabilities that might not normally be considered in the same breath — for example, the combination of pricing and loyalty. Pricing, typically owned by merchandising, is rarely considered at the same time and by the same people as marketing, particularly around loyalty programs, where many retailers aren’t even sure how to use loyalty programs to their advantage.

However, one of the biggest, and most important, intersections between pricing and loyalty is promotions. RSR’s research over the last three years has consistently found that retailers have bought into the notion that one of the easiest ways to achieve localization is through price — the way to increase sales and margin is by getting more granular in how assortment and pricing decisions are made. The challenge is in the implementation. How do you explain to a shopper that the online price is different than in store just because? Or worse, how do you explain why a price is different in one store than another just down the street? “Because customers in the other store are less price sensitive, so we can get away with charging more “? As a customer, that answer wouldn’t fly with me, and given the extreme price sensitivity that still exists out there, it’s a risk to expose the fact that you might charge different prices in different circumstances — it reduces customer trust.

So how do you get the benefits of price localization without alienating shoppers? Here is where loyalty becomes important. Because it’s a lot easier to explain that this customer got a different price than you did because she gives us more of her business than you do. Loyalty becomes the personal communications method for delivering localized offers directly into customers’ hands. But as soon as you start talking about processes that exist at the intersection of two different organizations (like marketing and merchandising), or two different capabilities (like pricing and loyalty), you start uncovering an area that has not received a lot of focused process attention — assuming that a well-defined process exists at all. It’s too easy for things to fall between the cracks.

Unwinding the process challenges that surround promotions — whether you’re talking about the generic kind, but most especially the targeted, localized kind — can be extremely difficult, not least because the technology systems that support promotions can be all over the place.

I have a feeling, as retailers start narrowing in on the gaps around their promotions processes, that the underlying platform that supports promotions is also going to come under closer consideration, and the first pass is going to show something ugly. Here’s why. What do you need in order to execute personalized promotions (and we’ll use the easy case, where we’ll assume that you already have a loyalty program in place, so that you can actually deliver personalized offers to your customers)? You need:

• (Clean) Sales History: Clean cannot be assumed, as many retailers who pursued promotion optimization in 2008-09 discovered. And if you want to be able to make customer offers, then you need sales history by customer. This is the beginning of the pain for retailers that don’t have loyalty programs, because PCI makes it a no-no to use payment information as a customer identifier. There are ways around this that don’t require loyalty program participation, but it’s a lot harder without one.
• Elasticity: In other words, the analysis that yields the price sensitivities by product and by customer groups. This is typically owned by a pricing optimization solution, which lives in merchandising.
• Customer Segments: At the same time, you need the customer segments that you’re going to go to market with. This can be a chicken-and-egg problem — do you use price sensitivity and purchasing affinity in order to create segments, or do you strategically define segments and then use their affinities to pursue offers? Either way, customer segments, their attributes, and their loyalty program status, are not owned or managed by a pricing application — these typically live in some kind of CRM, loyalty, or analytics application, in the marketing department.
• Promotion Planning: Customer segments and pricing come together at a high level in promotion planning, where the primary offers that are going to be made are pulled together. A lot of the work that needs to happen here is not driven by systems — promotion planning theoretically OUGHT to involve marketing, merchandising, and supply chain, at a minimum. From our recent research on pricing, we also found that retailers are looking to include Finance, in order to make sure that the offers they are making are profitable. Sometimes this is an extension of the pricing suite, sometimes it’s spreadsheets and meetings. Sometimes, a loyalty solution will manage some portion of this.
• Pricing Rules: Where the rubber hits the road. Pricing rules are the intersection between the prices and the offers you want to make, and the rules for determining who sees those prices and who gets those offers. Unfortunately, this could potentially be owned by your point of sale system, your loyalty solution, and/or your pricing solution — deciding exactly where in your solution portfolio this needs to live, and who exactly ought to own it, is the heart of the trouble with promotions today. As more retailers are looking to optimized promotions, and more are looking to align their store and eCommerce channel strategies, it will be difficult to make the case that pricing rules should be owned by POS, or by loyalty. But getting there, particularly pulling it out of store systems, will be the challenge.
• Sales Capture: This is whatever channel application you’re using, whether eCommerce or store, or even mobile nowadays, but the important thing to note is that garbage-in/garbage-out definitely applies. If you can’t capture clean transactions, with customer identifiers attached whenever possible, when you move back to the top of this list to get to clean purchase history, you’ll be starting from a much more difficult place as a result.

Promotions aren’t easy. They aren’t simple. They currently live in a gap between Merchandising and Marketing, when they need to be a cooperative process that also ropes in Supply Chain (there is no point in making an offer if you don’t have the product), and Finance (there is no point in making an offer if it causes you to lose money hand-over-fist). But no matter your strategy, or your intent around promotions going forward, the most important place to start is to take a hard look at what you have in place today. The road to get to localized prices and promotions may be longer than you think.