Retail promotions: Consumers' effectiveness in availing them and retailers' success in using them
Gauri, Dinesh Kumar
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Weekly price promotions are a pervasive feature of grocery retailing. A.T. Kearney (2005) estimates that retailers spend from 5 to 10% of their gross revenues in a category on promotions. A.C. Nielsen (2006) estimates that U.S. retailers spent 26.7 billion dollars on promotions in 2005. Given such widespread use and the magnitude of the dollars spent, managers and academicians have a great interest in understanding how consumers react to retail price promotions and how it affects retailer profitability. In designing promotions and allocating the limited resources across various promotion types, retailers also have to know which performance measure is being affected most and by which type of promotion. In this dissertation, we investigate the role of retailer promotion in the market place from both consumers' and retailers' perspectives. Specifically, the first essay attempts to answer three questions: First, how effective are the temporal, spatial and spatio-temporal price search strategies in obtaining lower prices? Second, what is the impact of alternative price search strategies on retailer profit? Finally, what are the predictors of household decisions to perform either spatial or temporal price search, both or neither? Using both survey and scanner data, we find that: Households that claim to search spatio-temporally avail about 3⁄4 of the available savings on average; even those that claim not to systematically search on either dimension avail about 1⁄2 of the available savings. The negative effect of cherry picking on retailer profits is not as high as is generally believed. Geography and opportunity costs are useful predictors of a household's price search pattern. In the second essay, we focus on the most "extreme" of consumers' cherry picking behavior from retailers' perspective. Specifically, the focus is on that segment of consumers who visits a retailer to buy just the deeply discounted items (viz., those items that are put on 'loss leader' pricing by the retailer), there by essentially generating negative profit contribution for the retailer. Since loss leader pricing strategy is a very popular promotion strategy for the grocery retailers, it becomes very important for research to focus on the following issues: (1) Estimate the size of the extreme cherry picking segment across different stores in different market contexts; (2) Identify the key market characteristic drivers of such segment size by performing an aggregate level analysis at the store level; (3) Identify the key consumer characteristic drivers of the extreme cherry picking behavior by performing a disaggregate level analysis at the consumer level; and (4) Estimate the incremental net positive impact, if any, of loss leader pricing strategy on the bottom-line of the retailer, which is likely to be the most critical information of interest to a retailer. In the third essay, we study the effects of various kinds of promotional, specifically loss leader and feature promotion pricing strategies, offered by the store on its performance (traffic, sales and profit) at aggregate (store) level and whether such effects translates to disaggregate levels (category). Based on this research, among the few key things, we will be able to study the: (1) Overall impact of loss leader promotion strategy on critical store performance measures; (2) Identify the relative effectiveness of different product categories used as loss leaders on various measures of performance at store (aggregate) level; (3) Estimate the cross-category relationship between loss leader promotions and performances in terms of traffic, sales and profits. The scope of our analysis is unique both in terms of the types of promotions and the breadth of categories covered.