Why Responsiveness to Retail Promotions Varies Across Retailers
New Research Looks Beyond Price Cuts
Research by Sanjay K. Dhar and Peter E. Rossi
For years, retailers have relied on three types of retail promotional tools to sell their products: temporary price cuts, feature advertisements, and in-store displays. Under what retail conditions are these tools most effective for increasing sales?
Manufacturers often observe enormous differences across retail
accounts in response to promotional activities. However, most
studies focus only on consumer response to price cuts, usually
due to insufficient data, and little is known about the determinants
of in-store display and feature advertising response. A recent
study, "The Role of Retail Competition and Account Retail
Strategy as Drivers of Promotional Sensitivity," by Sanjay
K. Dhar and Peter E. Rossi, professors at the University of
Chicago Graduate School of Business, and Peter Boatwright
of Carnegie Mellon University's Graduate School of Industrial
Administration is the first to simultaneously examine what
factors drive consumer responses to price cuts, feature advertisements,
and in-store displays.
Using a comprehensive data set with all U.S. markets and
all major retail grocery chains represented, Dhar, Rossi,
and Boatwright investigated the role of retail competition,
retail strategies, and demographics in determining consumer
response to these three types of promotions.
Feature ads are leaflets or circulars from a grocery store
inserted in a newspaper midweek to announce a store's special
deals or sales during that specific week. Displays are usually
"shelf-talkers" that draw attention to the price
cut offered on a product.
The findings indicate that retail strategies and consumer
characteristics greatly influence how responsive consumers
will be to price cuts, features, and displays. Retail competition,
while still important, turns out to have relatively less impact
on consumer response.
"Retailers make long-term decisions when setting up
their store, such as determining the size of the store, location,
retail price positioning strategy, etc.," says Dhar.
"These actions are supposed to help retailers sell more
and differentiate themselves in the marketplace. At the same
time, these actions will affect the extent to which consumers
respond to price cuts, feature ads, and displays at their
stores."
Conditions for Effective Promotions
To study the relationship between consumer responsiveness
to price cuts, features, and displays and retailer and consumer
characteristics, the authors used a data set that included
data on the sales of ground coffee in 97 major U.S. retail
accounts across 35 Nielsen Scantrak markets. A retail account
is defined as a specific retailer/market combination, such
as Safeway-Denver. Weekly sales data for the Folgers and Maxwell
House brands was combined with demographic data and market
and account characteristics using a one-step statistical method
developed at Chicago GSB. The authors simultaneously measured
the consumer responsiveness to price cuts, features, and displays
at different retail accounts and related it to explanatory
variables grouped under three categories: retail strategy,
demographic variables, and retail competition. Collectively,
retail strategy, demographic variables, and retail competition
explain about 30 percent of the variation in consumer response.
Two major retail strategies affect consumer response: price
format and store format. Retailers typically use the Everyday
Low Pricing (EDLP) or Hi-Lo pricing strategy. Since prices
at EDLP stores are always reduced, these retailers do not
offer as many promotions. Furthermore, discounts at EDLP stores
are typically lower than at other stores, due to the already
heavily discounted normal prices. Hi-Lo stores normally have
high regular prices, and then reduce those prices by substantial
amounts, discounting more frequently than EDLP stores.
The results show that consumers who shop at stores with an
EDLP pricing strategy are less sensitive to short-term price
cuts than consumers at Hi-Lo stores.
Store location and breadth of product assortment also impact
consumer response to promotions. Retail chains with more stores
in a geographic market do not get as much benefit in sales
from using feature ads as chains with fewer stores. In addition,
consumers who shop at retail chains with a large number of
stores in a given market are less likely to be influenced
by displays, since they are already familiar with store layout.
In markets with greater retail competition, there is greater
price sensitivity, making consumers more responsive to price
cuts. More competition makes it easier to compare prices across
national brands.
Important consumer characteristics in determining promotional
response are household income, home value, and age. Higher
income consumers are less likely to respond to price cuts,
but more likely to use feature ads and in-store displays to
save time and effort in searching for better prices. For older
consumers, physical and mental constraints mean that they
are more likely to use feature ads and displays to make searching
for better prices easier. The study shows that older consumers
are more sensitive to displays and features than price.
The authors also gauged consumer sensitivity to retail promotions
by looking at private label share. Private label share refers
to brands that are sold under the retailer's name and are
typically priced much lower than national brands. Dhar, Rossi,
and Boatwright used private label share as an indicator of
price sensitivity in the study since a high private label
share suggests a price sensitive customer base. According
to the results, private label buyers are indeed more price
sensitive than other buyers.
Getting the Right Mix
The data set's comprehensiveness over many markets allowed
the authors to make broad observations about retail strategy,
demographic variables, and competition. The study calls attention
to the importance of account retail strategy variables in
affecting consumer response to price cuts, features, and displays.
"Since consumer packaged goods manufacturers favor trade
promotions over advertising and spend vast amounts to get
retailers to pass the trade promotion money in the form of
retail promotions, it is very important to understand how
consumers will respond to retail promotions at different retail
accounts," says Dhar.
From long-term strategies such as store size to short-term
strategies about how much to emphasize private labels, the
study demonstrates that retailers must start thinking about
the consequences of these strategies in order to ensure the
effectiveness of their promotional tools.
Sanjay K. Dhar is professor of marketing and 2003-04 David W. Johnson Professor at the University of Chicago Graduate School of Business. Peter E. Rossi is Joseph T. Lewis Professor of Marketing and Statistics at the University of Chicago Graduate School of Business.
