Marketing Mix Strategies VI: Price Promotions

Professor Ofer Mintz

Today’s Class Outline
• Main takeaway: Price promotions, while used very frequently, often harm firms long-term • Structure: – Current Events – Recap – Price Promotion Overview – Price Promotion Results – Price Promotion Calculations – Case: Consumer Sales Promotions

Current Events

Class Approach to Marketing Management
1. Understand customers, markets, and own business 2. Develop a goal based on this understanding 3. Select the appropriate marketing mediums and mix to accomplish goal 4. Measure, evaluate, and possibly reformulate

Recap
Understanding own business and market from customers point of view
– Shape Organization to Focus on Customers POV – Value Proposition – Points-of-Differentiation and Points-of-Parity

Recap
FACTOR 2
1.25 1 0.75 VW RABBIT NISSAN SENTRA HONDA ACCORD

IS1

Economy

0.5 0.25 0 -0.25 -0.5 -0.75 -1 -1.25 -1 0 1 2 FORD MUSTANG THUNDERBIRD OLDSMOBILE

BMW
PORSCHE

FACTOR 1

Performance/Quality

Recap
Observed Behavior
- Purchase Data - Trackers of Behavior

Quantitative
- Conjoint Analysis - Experiments - Questionnaires

Qualitative
- Focus Groups - Interviews - Observational / Ethnographic

Source: Mizik (2010), MIT OpenCourseWare

Recap
Initiator Influencer Decider Buyer User

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Recap

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Price Promotion Objectives
• Consumers
– Encourage purchase of larger units, build trial among nonusers, attract switchers from competitive brands

• Retailers
– Induce to carry new items, higher levels of inventory, encourage off-season buying, encourage stocking of related items, offset competitive promotions, building brand loyalty of retailers, gaining entry into new retail outlets

• Sales Force
– Encourage support of new products, encourage more prospecting, stimulate off-season sales

Price Promotions Tactics
• • • • Samples Coupons Cash refund offers Price offs • • • • • Premiums Prizes Patronage rewards Free trials Tie-in promotions

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Price Promotion Results
• Price promotion sales come near equally from other brands, shifting purchases from other periods, and category expansion plus harder to quantify sources like other stores and own-branded items • The higher the frequency and the deeper the price promotion, the lower (toward zero) the price elasticity on the long term • Display and feature multipliers show similar average magnitudes; in the absence of a price cut sales often doubles with display or feature

Price Promotion Results
• Price promotions do not influence brand equity and stock market returns
– Only 1 out of 10 price promotions contributes the profit of a firm in middle/long run

• Price promotions create both lagged and lead effects, consistent with consumers both stockpiling and anticipating future promotions
– There is a threshold effect, discounts lower than 10% do not lead to additional sales

Source: Blattberg et al.

Article: Who Benefits from Price Promotions?

Article: If Brands are Built Over Years, Why are They Managed Over Quarters? • Known short-term bounce in revenues
– Price promotions elasticity is -3.63 – Abundant short-term data – Wall Street pressures on quarter to quarter – Leads to bigger category “pie”

• Difficult to measure long-term marketing tactics
– Difficulty to get data in the past – Managers may leave business

Metrics Used by Managers to Evaluate Marketing Mix Activities
Marketing Mix Activity Marketing Metrics (mean) 3.81 2.93 4.09 3.41 3.63 2.88 3.86 Financial Metrics (mean) 2.98 1.83 3.36 3.33 1.90 3.53 4.00 Total Metrics (mean) 6.79 4.76 7.45 6.74 5.53 6.41 7.86

Traditional Advertising PR / Sponsorships Internet Advertising Direct to Consumer Social Media Price Promotions Pricing New Product Developments Sales Force Distribution Overall

4.71
3.10 3.84 3.63

4.25
3.75 4.18 3.20

8.96
6.85 8.02 6.83

Metrics to Analyze Price Promotions
• Top Five Metrics Used (% used):
1. 2. 3. 4. 5. Target Volume (77%) Promotional Sales / Incremental Lift (58%) Total Customers (49%) Market Share (47%) Net Profit (46%)

• Things that stood out:
1. 80% of highest performers and 77% of managers overall used target volume

Price Promotion Calculations
• How to investigate impact of promotion mix on market share from household data
– Suppose you obtain data on brand choice plus marketing mix information (price, price discount, in-store display)
Household id Choice Brand Price Heinz Hunts Delmonte Other (1) (2) (3) (4)
5.21 5.21 . . . 3.69 4.32 3.89 . . . 3.51 4.74 4.74 . . . 3. 89 3.57 3.57 . . . 2.78

End of Aisle Display (0=No; 1=Yes) Heinz Hunts Delmonte Other (1) (2) (3) (4)
0 0 . . . 0 0 1 . . . 0 0 0 . . . 0 0 0 . . . 0

1100001 1100001 . . . 1100340

1 2 . . . 1

Price Promotion Calculations
All observations

• We can calculate market share for each brand – Heinz 1319/2000=65.95% – Hunts 335/2000=16.75% – DelMonte 210/2000=10.5% – Others 136/2000=6.8%
• Q1: If Hunts price decreased by 10% and special display was used, how much increase in market share would be expected? • Q2: If “ by 20% and special display was used, “? • Q3: From which brands would this expected increase in market share come from?

Price Promotion Calculations
• Estimate the effects of marketing mix on brand choice
– Assume consumer chooses brand (j) on purchase occasion (t) that maximizes his/her utility

Pt ( j ) 

 exp(U
k

exp(U jt )
kt

)

– Utility may be defined as follows:
• Ukt = αk + β1PRICE kt+β2DISPLAYkt + εt

Price Promotion Calculations
• Estimate the effects of marketing mix on brand choice
– Assume consumer chooses brand (j) on purchase occasion (t) that maximizes his/her utility
How brand(j) attractive is to customer in time t

Pt ( j ) 

 exp(U
k

exp(U jt )
kt

)
Sum of brands (k=4)

– Utility may be defined as follows:
• Ukt = αk + β1PRICE kt+β2DISPLAYkt + εt
Brand specific constant (avg mkt share)

Price Promotion Calculations
• Coefficients can be estimated in a way that the log likelihood is maximized

max LL  max  ln{Pht ( j; ,  )}
 
h t j

– To estimate model, one needs to select a base brand (b/c utility is a relative concept)
• Utility of base brand is set at 0 • This is equivalent to subtracting the base brand’s marketing mix variables from those of all brands

SAS Programming Price Promotions
• v

SAS Results

Price Promotion Calculations
• Results of brand choice model estimation
Household id Choice Brand Heinz (1) Brand Intercepts (αk ) Hunts Delmonte Other (2) (3) (4)
-2.4 -27.1 -2.6 -26.5 -3.4 -30.1 -1.3 -21.3 1.0 6.6

Price (β1)

Display (β2)

Coefficients T-value

• Using estimated coefficients, we can predict consumers’ brand choice decisions when they are exposed to different marketing activities

Price Promotion Calculations
Household id Choice Brand Heinz (1) Brand Intercepts (αk) Hunts Delmonte Other (2) (3) (4)
-2.4 -27.1 -2.6 -26.5 -3.4 -30.1 -1.3 -21.3 1.0 6.6

Price (β1)

Display (β2)

Coefficients T-value

Household id

Choice Brand

Price Heinz Hunts Delmonte Other (1) (2) (3) (4)
5.21 5.21 . . . 3.69 4.32 3.89 . . . 3.51 4.74 4.74 . . . 3. 89 3.57 3.57 . . . 2.78

End of Aisle Display (0=No; 1=Yes) Heinz Hunts Delmonte Other (1) (2) (3) (4)
0 0 . . . 0 0 1 . . . 0 0 0 . . . 0 0 0 . . . 0

1100001 1100001 . . . 1100340

1 2 . . . 1

Price Promotion Calculations: Q1
• Consumer’s utility function is as follows:
– UHeinz, t = 0 + { -1.3*(PRICEHeinz, t –PRICEHeinz, t )} + {1.0*(DISPLAYHeinz, t – DISPLAYHeinz, t )} – UHunts, t = -2.4 + { -1.3*(PRICEHunts, t –PRICEHeinz, t )} + {1.0*(DISPLAYHunts, t – DISPLAYHeinz, t )} – UDelMonte, t = -2.6 + { -1.3*(PRICEDelMonte, t –PRICEHeinz, t )} + {1.0*(DISPLAYDelMonte, t – DISPLAYHeinz, t )} – UOther, t = -3.4 + { -1.3*(PRICEOther, t –PRICEHeinz, t )} + {1.0*(DISPLAYOther, t – DISPLAYHeinz, t )}

• For example, for household 1, occasion 2 – Utility calculations
• • • • UHeinz, t = 0 + { -1.3*(5.21 – 5.21 )} + {1.0*(0 – 0)} = 0 UHunts, t = -2.4 + { -1.3*(3.89 – 5.21)} + {1.0*(1 – 0)} = 0.3186 UDelMonte, t = -2.6 + { -1.3*(4.74 – 5.21)} + {1.0*(0 – 0)} = -1.989 UOther, t = -3.4 + { -1.3*(3.57– 5.21)} + {1.0*(0 – 0)} = -1.268

Price Promotion Calculations: Q1
• For example, for household 1, occasion 2 (continued) – Take exponential
• • • •
• • • •

– Probabilities of choosing each brand
Pt(UHeinz, t )= 1 / 2.7933 = 0.358 Pt(UHunts, t )= 1.3752 / 2.7933 = 0.492 Pt(UDelMonte, t )= 0.1368 / 2.7933 = 0.049 Pt(UOther, t ) = 0.2813 / 2.7933 = 0.100

Exp(UHeinz, t )= 1 Exp(UHunts, t )= 1.3752 Exp(UDelMonte, t )= 0.1368 Exp(UOther, t ) = 0.2813

The denominator (∑exp(Ukt)) = 1+ 1.3752 + 0.1368 + 0.2813 = 2.7933

• The purchase probability for entire observation = expected market shares – Heinz 1151/2000 = 58% – Hunts 839/2000 = 42% – DelMonte 10/2000 = 1% – Other 0/2000 = 0%

Price Promotion Calculations: Q1-3
Original Heinz Hunts DelMonte Others 65.9% 16.8% 10.5% 6.8% 10% and display 58% 42% 1% 0% 20% and display 49.9% 50% .1% 0%

Case: Consumer Sales Promotions
1. Consider 2 of 4 promotions described, (1) Amcrew Styling Gel and (2) Totalrinse Gel Antiseptic. One of these promotions was judged successful by the manufacturer while the other was judged to be unsuccessful. Identify each and present both qualitative and quantitative aspects of your reasoning. 2. Following your analysis above summarize factors you believe positively influence the performance of a sales promotion.

Next Class
• TOPIC:
– Marketing Mix Strategies IX: Pricing

• DUE:
– Think of a product you have and like

• READ:
1. KK: Read Chapter 14 2. CR: “Retail Frenzy: Prices on the Web Change Hourly”