nicolas.vandeput@supchains.

com

How Promotions Impact your Demand Forecasts

Many supply chains serve promotion-driven markets. Including promotions in their
forecasting models will drastically improve forecasting accuracy while reducing planners’
workload. This article discusses how promotions impact demand and which models to use to
forecast promotion-driven products.

If you do business in a promotion-driven market, promotions most likely have a massive

impact on demand. As they can be easily tracked and planned, they should be included in your
model.

Figure 1 Impact of promotions on demand and forecast (FMCG distributor).

When running promotions, you will face two different effects: self-cannibalization
(promotions often result in a down-up-down sales cycle) and cross-cannibalization (promoting
one article often impacts the sales of other similar products). Let’s review these two effects in
detail. Then, we will discuss how forecasting models can capture these effects.

Self-Cannibalization
Promotions are challenging to model as they often result in preorders, clients delaying their
purchases in expectation, and rebound effects. As Figure 2 illustrates, when doing recurring
(or announced) promotions, you can expect lower demand before and after the discounted
periods. Sales will follow a down-up-down cycle.

Figure 2 Demand scenarios and self-cannibalization (Automotive manufacturer).

nicolas.vandeput@supchains.com

At SupChains, we call this effect self-cannibalization, as promoting a product in month M will

result in lower sales in months M-1 (if the promotion was announced or expected) and M+1.
(As a personal example, I like to wait for Black Friday to buy goods. Often to realize that the
goods I want are out-of-stock or not discounted.)

Cross-Cannibalization
Promoting a specific product will also impact demand for other similar items. For example,
discounting apples will likely result in lower sales for other similar fruits.

Figure 3 Cross-cannibalization on pears due to promotions on apples.

Flagging the products that are impacted by cross-cannibalization isn’t trivial. It will require
deep business knowledge and a skilled data analyst (using Python).

In some cases, you might get the opposite effect. For example, consumers will buy discounted
products along with some extras. Or you will enjoy more clients in your (virtual) stores as they
are attracted by specific promoted-products (and these clients will buy other unrelated goods
as well).

Tracking Promotions
Promotion Mechanics
Before jumping to the modeling part, we must first discuss how to capture historical
promotions.

If your promotions are straightforward (“-30% discount”), it is usually easy to do so. But, for
many businesses, it can get challenging and you should be careful about a few specificities:
- Mechanic. Some promotions aren’t direct. Instead, you will grant your clients a refund
later, or give them free credits to buy other products. Moreover, giving “buy one get
one free” isn’t perceived the same way as giving a straight 50% discount.
- Advertisement. Your business could advertise the promotions, which will result in
higher sales. So, the same promotions could have a drastically different impact
depending on the marketing budget (or communication channel) associated with it.
- Target. Your business could do discounts for a certain type of client (such as recurring
clients).
nicolas.vandeput@supchains.com

If you deal with elaborate promotion plans, you can either:

- Model each type of promotion separately. As discussed in the following section, if you
run plenty of unique promotion mechanisms, this might not work for your forecast
engine.
- Track actual discounted sales prices (and not pay attention to the exact type of
promotion that was run). This solution might work well in many situations as it will be
an apple-to-apple comparison for your forecasting model.

Tracking Promotions
Usually, demand planners can load upcoming promotions in the model using a simple
template (such as an excel file) or graphical interfaces where they can flag promotions.
Nevertheless, due to the nature of your market, promotions can be run on short-term notice
(for example, to get rid of excess inventory). Obviously, promotions that aren’t included in
time in the forecast won’t be correctly forecasted---even by the most advanced forecasting
model. This is, of course, unfortunate, but at least by including these promotions after the
fact, you will not confuse your model further by providing it with skewed sales data.

Capturing Promotions with Forecasting models

Statistical vs. Machine Learning Models

Most statistical models will struggle to capture the elaborate effects of promotions, especially
if you have to consider both the rebounds (self-cannibalization) and the impact on other
products (cross-cannibalization).

On top of this inherent difficulty in capturing complicated, non-linear effects, statistical

models will likely suffer from a lack of data. Indeed, most promotions are often only run once
or twice a year (think Black Friday or Valentine’s Day). Learning demand patterns based on a
couple of observations only will be challenging for any statistical model. (To attenuate this
effect, as explained above, you could capture discount rates rather than tracking each type of
promotion separately.) This can even get more complicated if you deal with short-life-cycle
products (typically anything technology or fashion related). On top of that, businesses also
tend to promote goods that have never been discounted before.

This is where machine learning models will shine as they are impressive at capturing these
elaborate effects, as shown in multiple previous case studies (here, and here). Machine
learning will also be able to predict the impact of making a promotion on a product that was
never promoted before.

Despite their inability to capture complex relationships, statistical models will allow you to get
a clear understanding of how promotions impact demand. Unfortunately, machine learning
models are black boxes – you won’t be able to read the model to see how promotions impact
demand. Nevertheless, you can run different forecast scenarios to see how promotions impact
future demand.

In any case, models can have a difficult time adequately capturing the effect of indirect
promotions such as “buy one today and get a 10-euro coupon to spend next month”.
nicolas.vandeput@supchains.com

Do not Clean Promotions Uplifts

Some planners like cleaning out historical promotions before forecasting future demand. It is
not a good practice to manually clean history as this is inefficient and an open door for data
hacking (modifying historical demand will allow your planners to raise their accuracy
artificially). If you are regularly cleaning historical promotions, consider investing in a
forecasting tool where you can flag promotions so that the tool can automate this cleaning
for you. A better solution would be to choose a forecasting engine that can forecast
promotions directly so you will be able to analyze the expected sales uplift.

Business Analytics
Using your advanced forecast engine, you will also be able to analyze the impact of historical
promotions. This means getting a clear idea of how much sales uplift you enjoyed versus how
much rebates you had to give. This kind of analysis will for sure interest your colleagues from
marketing, sales, and finance – putting the demand planning function at the center of the
game.