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 new
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 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
"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
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
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 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.