Findings—Retailer Promotion Pass-Through: A Measure, Its Magnitude, and Its Determinants

Abstract

We use data on all manufacturer funding and all promotion activity by a major US retailer during a two-year period to compute promotion pass-through and assess its magnitude. Then we estimate a two-tiered probit and lognormal regression model to study drivers of the large variation we observe in pass-through rates. Although our analysis is based on data from a single retailer, it provides a much more complete picture of the magnitude and variability of pass-through than has been available to date. Some key insights from our work are as follows. First, the retailer passes through more than 100% of the total manufacturer funding it receives in aggregate but the median pass-through rate for individual manufacturers is much lower than 100%. Second, some manufacturers are promoted even without funding. This is more likely for private label and high share manufacturers in high lift and high margin categories. Third, a small number of manufacturer and category characteristics explain a significant amount of the variation in pass-through. In particular, passthrough is higher for private label. It increases with the share of the manufacturer in the focal category but also with the sales of that manufacturer in other categories. And categories with high sales, high promotion lift, low concentration, and low margin get more pass-through. We are able to corroborate some recent conclusions in the literature, e.g., that some pass-through rates are much higher than 100% and high share manufacturers get more pass-through. We add several new insights, e.g., on the magnitude of aggregate pass-through, cross pass-through across and within categories, pass-through for private label, and the category drivers of pass-through.

Decision Stages and Asymmetries in Regular Retail Price Pass-Through

“…The two features aggregate together to yield lower overall pass-though for private label SKUs (bottom panel of Figure 6). This finding is interesting in light of prior work which has found that retailers are more likely to pass through price promotions for private label products (Ailawadi and Harlam 2009). Together, these results suggest that the retailer is quite sensitive to the price of private label products.…”

“…The aggregate data approach to estimating pass-through was employed by Ailawadi and Harlam (2009) who examined the annual pass-through of trade promotion dollars. In particular, they calculated the annual total dollars spent by the manufacturer in the form of trade promotions and divided this by the annual dollars spent by the retailer in the form Author: Decision Stages and Asymmetries in Regular Retail Price Pass-through Article submitted to Marketing Science; manuscript no.…”

“…7 of temporary price discounts to obtain an overall annual measure of pass-through. Under this approach, Ailawadi and Harlam (2009) found that (i) 20% 35% of observations have zero pass-through of trade promotion dollars and (ii) there is substantial heterogeneity in annual trade promotion dollars pass-through across categories with several categories showing annual pass-through in excess of 100%.…”

“…In contrast, price promotions, which are studied by Ailawadi andHarlam (2009) andNijs et al (2010), are managed via an entirely di↵erent process at this retailer. Promoted price changes often occur several times per year and are heavily influenced by trade promotion funds.…”

“One-deal-fits-all?” On Category Sales Promotion Effectiveness in Smaller versus Larger Supermarkets

“…whether the promotion applies to private label or manufacturer brands. Apart from margin differences (Ailawadi et al 2006) and differences in retailer pass-through (Ailawadi and Harlam 2009), these brand types may differ in their promotional appeal in small versus large outlets (Gijsbrechts et al 2003). Therefore, investigating the deal effectiveness of national brands and private labels across stores of varying selling areas may be a relevant topic for future study.…”