Measuring the Dynamic Effects of Promotions on Brand Choice

Abstract

Promotions are being used with increasing frequency by manufacturers facing highly competitive markets, which is causing concern among some marketers who feel that frequent promotions can hurt a brand. Nevertheless, there is little empirical evidence to either support or dispel such fears. To fill this gap in the literature, the authors propose a brand choice model that provides an estimate of the dynamic effects of promotions on loyalty to the brand and customers’ sensitivity to the price of the brand, and measures whether promotional purchases reinforce or reduce subsequent response to similar promotions. They estimate a random effects heteroskedastic covariance probit time-varying parameter model on household scanner panel data from the liquid detergent category. Their results indicate that increased purchases using coupons erode brand loyalty and increase price sensitivity. In addition, the authors find that the effect of features and displays on brand choice is reinforced by prior feature and display purchases, respectivly, as well as by feature and display purchases associated with price cuts. Future research directions are also discussed.

Customer-adapted coupon targeting using feature selection☆

“…Without making a distinction between users and non-users, Lattin and Bucklin (1989) found a significant increase in customers' purchase probability after a promotional purchase while Ailawadi, Lehmann, and Neslin (2001) only found a limited impact on customer retention for the product. Papatla and Krishnamurthi (1996) add: 'Positive effects could be a consequence of preference reinforcement for a purchased brand'. Several studies support that promotions result into brand-switching behavior (Bell, Jeongwen, & Padmanabahn, 1999).…”

“…Most past research focuses on coupon proneness and the effects of coupons on product purchases (Papatla & Krishnamurthi, 1996). They hardly ever examine predictability nor question which information is valuable for the models in this respect.…”

“…Building models without taking this into account possibly leads to worse predictions. As mentioned above, Papatla and Krishnamurthi (1996) signal the existence of different segments in the population, some being more sensitive to promotions than others. Moreover, they confirmed that the difference could be in more than one dimension.…”

“…We also included variables that represent the spending in different types of brands (national brand, store brand, private brand and exclusive brands) as a representation of brand loyalty (Papatla & Krishnamurthi, 1996) . Ortmeyer, Lattin, and Montgomery (1991) indicate that customers with a low preference for a brand exhibit a limited sensitivity to promotions for that brand.…”

“…For several popular product categories more than half of the sales volume is generated when products are offered with a price reduction (Blattberg & Neslin, 1990). This results from the fact that most products are in an advanced stage of their life cycle and product differentiation becomes a hard job (Papatla & Krishnamurthi, 1996). As a result, the distribution of coupons is more than ever an important topic to be considered by marketing managers.…”