The Decomposition of Promotional Response: An Empirical Generalization

Abstract

Price promotions are used extensively in marketing for one simple reason—consumers respond. The sales increase for a brand on promotion could be due to consumers accelerating their purchases (i.e., buying earlier than usual and/or buying more than usual) and/or consumers switching their choice from other brands. Purchase acceleration and brand switching relate to the primary demand and secondary demand effects of a promotion. Gupta (1988) captures these effects in a single model and decomposes a brand's total price elasticity into these components. He reports, for the coffee product category, that the main impact of a price promotion is on brand choice (84%), and that there is a smaller impact on purchase incidence (14%) and stockpiling (2%). In other words, the majority of the effect of a promotion is at the secondary level (84%) and there is a relatively small primary demand effect (16%). This paper reports the decomposition of total price elasticity for 173 brands across 13 different product categories. On average, we find that 25% of the elasticity is due to primary demand expansion (i.e., purchase acceleration) and 75% to secondary demand effects or brand switching. Thus, while Gupta's finding that the majority of promotional response stems from brand switching is supported, the average magnitude of the effect appears to be smaller than first thought. More important, there is ample evidence that promotions have a significant primary demand effect. The relative emphasis on purchase acceleration and brand switching varies systematically across categories, and the second goal of the paper is to explain this variation as a function of exogeneous covariates. In doing this, we recognize that promotional response is the consumer's reaction to a price promotion, and therefore develop a framework for understanding variability in promotional response that is based on the consumer's perspective of the benefits from a price promotion. These benefits are posited to be a function of: (i) category-specific factors, (ii) brand-specific factors, and (iii) consumer characteristics. The framework is formalized as a generalized least squares meta-analysis in which the brand's price elasticity is the dependent variable. Several interesting results emerge from this analysis. • Category-specific factors, brand-specific factors, and consumer demographics explain a significant amount of the variance in promotional response for a brand at both the primary and secondary demand levels. • Category-specific factors have greater influence on variability in promotional response and its decomposition than do brand-specific factors. • There are several instances where exogenous variables do not affect total elasticities yet significantly affect individual components of total elasticity. In fact, the lack of a significant relationship between the variables and total elasticity is often due to offsetting effects within two or more of the three behavioral components of elasticity. This is particularly true for brand-specific factors, which typi...

Market Segmentation From a Behavioral Perspective

“…Scriven et al (1999) concluded the opposite and found that the under 45's were consistently more sensitive to price change. A number of studies also showed insignificant or no effect of demographics on consumer price responsiveness (Bell et al 1999;Boatwright et al 2004;George et al 1996;Kim et al 1999;Scriven and Ehrenberg 2004).…”

Sales by multi-product retailers

“…Other recent studies of the impact of promotion on purchase behavior go beyond estimation of the "primitive" elasticities of incidence, choice and quantity to conduct meta-analyses of the response parameters themselves. Bell, Chiang and Padmanabhan (1999) use this approach to find that storability has a positive effect on primary demand response to promotions (quantity, but not incidence) as well as a positive effect on secondary demand, or brand choice.…”

“…More specifically, much of the marketing research in this area focuses on differentiating between the impact of price promotion on: (1) volume or market share of a particular brand or variety and (2) overall store or category-level volume (Gupta 1988;Bell, Chiang and Padmanabhan 1999;Pauwels, Hanssens and Siddarth 2002;Chintagunta 2002). Given that the effect on share and consumer numbers are necessarily specified in a very simple way in the theoretical model, we develop a more general econometric model to test the impact of both tools (number of sale products and depth of discount) on product and store sales.…”

Consumer Brand Choice: Money Allocation as a Function of Brand Reinforcing Attributes

“…This finding questions the supposition that the quantity consumers buy remains relatively constant across shopping occasions (cf. Bell, Chiang, & Padmanabhan, 1999;Ehrenberg, 1972Ehrenberg, /1988Gupta, 1988;Uncles et al, 1995).…”