21.15 Pricing and Promotions
Extensively studied
Issue of Everyday Low price vs Hi/Lo pricing
Short-term price discounts
offering trade-deals
consumer promotions
shelf-price discounts (used by everybody)
cents-off coupons (some consumers whose value of time is relatively low)
Loyalty is similar to inform under analytic modeling:
Uninformed = loyal
Informed = non-loyal
30 years back, few companies use price promotions
Effects of Short-term price discounts
measured effects (84%) (Gupta 1988)
Brand switching (14%)
purchase acceleration (2%)
quantity purchased
elasticity of ST price changes is an order of magnitude higher
Other effects:
general trial (traditional reason)
encourages consumers to carry inventory hence increase consumption
higher sales of complementary products
small effect on store switching
Asymmetric effect (based on brand strength) (bigger firms always benefit more)
- expect of store brands
Negative Effects
Expectations of future promotions
Lowering of Reference Price
Increase in price sensitivity
Post-promotional dip
Trade Discounts
Short-term discounts offered to the trade:
Advantages
Incentivize the trade to push our product
gets attention of sales force
Disadvantages
might not be passed onto the consumer
trade forward buys (hurts production plans)
hard to forecast demand
trade expects discounts in the future (cost of doing business)
Scanback can help increase retail pass through (i.e., encourage retailers to have consumer discounts)
Determinants of pass through
Higher when
Consumer elasticity is higher
promoting brand is stronger
shape of the demand function
lower frequency of promotions
(Online) Shelf-price discounts (Raju, Srinivasan, and Lal 1990)
- If you are a stronger brand you can discount infrequently because the weaker brands cannot predict when the stronger brands will promote. Hence, it has to promote more frequently
Coupons
Little over 1% get redeemed each year
The ability of cents-off coupons to price distribution has reduced considerably because of their very wide availability
Sales increases required to make free-standing-insert coupons profitable are not attainable
Coupon Design
Expiration dates
- Long vs short expiration dates: Stronger brands should have shorter windows (because a lot more of your loyalty customer base will utilize the coupons).
Method of distribution
In-store (is better)
Through the package
Targeted promotions
Package Coupons acquisition and retention trade-offs
3 types of package coupons:
Peel-off (lots more use the coupons) lowest profits for the firm
in-packs (fewer customers will buy the products in the first period)
on-packs (customers buy the products and they redeem in the next period) best approach
Summary
Trade and consumer promotion are necessary
Consumer promotion (avoid shelf price discount/news paper coupons, use package coupons
strong interaction between advertising and promotion (area for more research)
3 degrees price discrimination
- First-degree: based on willingness to pay
- Second-degree: based on quantity
- Third-degree: based on memberships
- Fourth-degree: based on cost to serve
21.15.1 Narasimhan (1988)
Marketing tools to promote products:
Advertising
Trade promotions
Consumer promotions
Pricing promotions:
Price deals
Cents-off labels
coupons
Rebates
Brand loyalty can help explain the variation in prices (in competitive markets)
Firms try to make optimal trade-off between
attracting brand switchers
loss of profits from loyal customers.
Deviation from the maximum price = promotion
Assumptions:
Firms with identical products, and cost structures (constant or declining). Non-cooperative game.
Same reservation price
Three consumer segments:
Loyal to firm 1 with size \(\alpha_1 (0<\alpha_1<1)\)
Loyal to firm 2 with size \(\alpha_2(0 < \alpha_2 < \alpha_1)\) (asymmetric firm)
Switchers with size \(\beta (0 < \beta = 1 - \alpha_1 - \alpha_2)\)
Costless price change, no intertemporal effects (in quantity or loyalty)
To model \(\beta\) either
- \(d \in (-b, a)\) is switch cost (individual parameter)
\[ \begin{cases} \text{buy brand 1} & \text{if } P_1 \le P_2 - d \\ \text{buy brand 2} & \text{if } P_1 > P_2 - d \end{cases} \]
- Identical switchers (same d)
- \(d = 0\) (extremely price sensitive)
For case 1, there is a pure strategy, while case 2 and 3 have no pure strategies, only mixed strategies
Details for case 3:
Profit function
\[ \Pi_i (P_i, P_j) = \alpha_i P_i + \delta_{ij} \beta P_i \]
where
\[ \delta_{ij} = \begin{cases} 1 & \text{ if } P_i < P_j \\ 1/2 & \text{ if } P_i = P_j \\ 0 & \text{ if } P_i > P_j \end{cases} \]
and \(i = 1,2, i \neq j\)
Prop 1: no pure Nash equilibrium
Mixed Strategy profit function
\[ \Pi_i (P_i) = \alpha_i P_i + Prob(P_j > P_i) \beta P_i + Prob (P_j = P_i) \frac{\beta}{2} P_i \]
where \(P_i \in S_i^*, i \neq j; i , j = 1, 2\)
Then the expected profit functions of the two-player game is
\[ \underset{F_i}{\operatorname{max}} E(\Pi_i) = \int \Pi_i (P_i) d F_i (P_i) \]
\(P_i \in S_i^*\)
such that
\[ \Pi_i \ge \alpha_i r \\ \int dF_i (P_i) = 1 \\ P_i \in S_i^* \]
21.15.2 Balachander, Ghosh, and Stock (2010)
- Bundle discounts can be more profitable than price promotions (in a competitive market) due to increased loyalty (which will reduce promotional competition intensity).
21.15.3 Goić, Jerath, and Srinivasan (2011)
Cross-market discounts, purchases in a source market can get you a price discounts redeemable in a target market.
- Increase prices and sales in the source market.