Pricing and promotions: when volume growth masks margin contraction

In Italian retail, there exists a question that few can answer with confidence: did this promotion create value or destroy it?

The numbers indicate success. Traffic increased 18%. Conversions rose 12%. Volume exceeded forecasts. Marketing campaign ROI registered positive.

Yet by quarter's end, overall margin declined. Not significantly—one percentage point, perhaps two. But it declined.
And few can determine whether the promotion caused the decline or merely coincided with a difficult period.

This constitutes the daily paradox confronting high-impact commercial decisions in retail: all tactical metrics improve, yet aggregate results deteriorate. Distinguishing signal from noise—separating effective decisions from those that merely appear functional due to favorable context—becomes extraordinarily complex.

The challenge isn't data scarcity. Rather, each function monitors different metrics, optimizes toward different objectives, and few measure systemic impact. What's missing is what we might call a decision layer over data and processes.

Sales and Marketing leaders in retail operate in a state of perpetual decision-making. New promotions require weekly evaluation. New budgets demand a monthly allocation. New performance pressures emerge quarterly.
An omnichannel retail chain executes hundreds of micro-decisions monthly: pricing by product, channel, and geography. Cyclical, flash, and seasonal promotions. Cross-channel budget allocation. Product line investments.
Each decision appears minor. The cumulative effect proves substantial.

Consider a concrete case:

Marketing launches a promotional campaign on a high-traffic product line. The promotion performs. Volume surges 25%. Traffic increases. Campaign ROI shows positive. All tactical indicators register green.
Yet few measure three hidden effects:

1. Temporal Cannibalization: Customers who would have purchased regardless (perhaps the following week) simply accelerated their purchase to capture the discount. Same customer, same product, lower margin.

2. Product Cannibalization: Customers who would have bought a higher-margin product within the same category selected the promotional item instead. Total volume unchanged, aggregate margin reduced.

3. Customer Training: Customers learn that the product regularly goes on promotion and cease purchasing at full price. Structural margin erosion on that line.

The fundamental problem: these effects remain invisible when examining individual initiative tactical metrics. They become visible only when assessing comprehensive portfolio impact over time—what we would define as an explicit trade-off analysis.
Sales monitors channel volume. Marketing tracks campaign ROI. Category management reviews line rotation. Few possess complete visibility.
When quarterly margins fall short of targets, determining causality becomes impossible: which promotions created value and which destroyed it? Which initiatives were performed due to sound design versus favorable context?

Operating under constant pressure, with quarterly objectives and fast-moving competitors, organizations react. They replicate what worked previously. Follow intuition. Test and adjust in real-time.
But reacting differs fundamentally from deciding. In retail, where margins run thin and competition proves fierce, this distinction costs between 5% and 7% of annual revenue in decision inefficiency. What's needed is an operating system for business decisions that enables choosing before the error becomes real.

Retail companies that have transformed their commercial decision-making approach—transitioning from tactical metrics to systemic impact measurement, from reaction to structured comparison between real alternatives—report significant outcomes:

• +2-4 percentage points in overall margin
• -20-30% in promotional cannibalization
• +15-20% in promotional effectiveness (same volume, reduced discount or higher margin)

Not by reducing promotional frequency. Not by decreasing investment. Rather by deciding which promotions to execute, on which products, at what moments, with what intensity—while viewing comprehensive portfolio impact.

The difference lies in decision governance systems:

• Compare alternatives before deciding (promotion vs. marketing investment vs. no action)
• Simulate scenarios ("what if...") rather than replicate the past
• Measure cross-effects (cannibalization, substitution, temporal displacement)
• Evaluate explicit trade-offs (volume vs. margin vs. positioning)

Process overhaul proves unnecessary. What requires change is how decisions get structured, evaluated, and executed—transforming decisions into business assets and building a reusable decision heritage.

Competitive advantage in retail won't emerge from more promotions or larger budgets. It will derive from the capability to distinguish value-creating initiatives from value-destroying ones—and doing so before committing resources, not after reviewing results—through decision risk reduction.

Organizations must begin adopting frameworks that structure choices effectively, making decisions defensible and demonstrable.

The question to ask isn't "did this promotion work?" but rather "did this promotion create net portfolio value or merely shift sales that would have occurred anyway?"