Executive Summary
Promotional spending by U.S. packaged goods manufacturers peaked in the late 1990s at more than 50% of the marketing budget and it continues to ride high. Therefore, whether this spending is effective for manufacturers and/or retailers is an important question, and the answer depends not only on the immediate or gross lift of a promotion but also on the sources of this lift. Researchers have evaluated promotion impact primarily from the perspective of manufacturers, and their focus has been almost exclusively on unit impact. However, retailers make decisions about promotions to consumers, and promotion impact for a retailer is different from promotion impact for a manufacturer. For a manufacturer, increased consumption and switches from current and future purchases of other brands make up incremental lift. Conversely, for a retailer, increased consumption and switches from current and future purchases in other stores make up incremental lift. Along with this incremental lift within the category, a retailer must consider the promotion’s effect on sales of other categories to quantify the net unit impact in the store and its regular and promotional margins, including manufacturer funding if any, to quantify the net profit impact in the store.
The purpose of this article is to quantify the net unit and net profit impact of promotions for a retailer and to understand the key correlates of this impact to improve future promotion performance. Using data on all promotions offered during 2003 by CVS, a leading U.S. drug retail chain, the authors (1) quantify the gross promotional lift for the retailer; (2) decompose this into switching, stockpiling, and incremental lift; (3) estimate “halo” (i.e., the extent to which promotion affects sales of other product categories in the store); (4) account for promotional and nonpromotional margins and manufacturer funding to compute the net unit and profit impact of the promotion; and (5) examine how promotion, brand, category, and store characteristics influence the net impact.
The authors find that 45% of the gross lift is due to switching within the store, and 10% is taken from future purchases in the store due to stockpiling. This leaves a substantial 45% as incremental lift for CVS, which is mainly from store switching. There is also a positive halo effect of promotion; for every unit of gross lift, .16 unit of some other product is purchased elsewhere in the store. Despite this substantial net unit impact, more than half of the promotions are not profitable, because CVS’s promotional margin is often significantly less than its regular margin. Furthermore, there is a large amount of variation in the net unit and net profit impact of different promotions. In the authors’ analysis of the correlates of net impact, they find that cross-store variation in net impact is a small component compared with cross-category and cross-brand variation. Furthermore, many promotion and brand correlates that are positively associated with net unit impact have a negative association with net profit impact. For example, deep, featured promotions on high “consumer pull” brands in widely distributed categories are effective in generating high net unit impact, but they are also those for which the retailer’s promotional margin is substantially lower than regular margin, resulting in lower net profit impact. In contrast, store brand promotions generate lower net unit impact but significantly higher net profit impact than national brand promotions. These findings reveal a difficult challenge for retailers; specifically, they must make a trade-off between sales and profit when designing their promotions.
Biography
Kusum L. Ailawadi is Professor of Marketing in the Tuck School of Business at Dartmouth College. She received her BSc and MBA degrees from Delhi University and the Indian Institute of Management, respectively, and her PhD from the University of Virginia. Kusum’s research interest is in the econometric modeling of (1) marketing spending decisions and their impact on firm, category, and brand performance and (2) the strategic interaction between packaged goods manufacturers and retailers and their relative performance. Her work has been published in journals such as Journal of Marketing, Journal of Marketing Research, Marketing Science, Sloan Management Review, International Journal of Research in Marketing, and Journal of Retailing. Kusum and her coauthors have won the Journal of Retailing William Davidson Award for the best contribution to the theory and practice of retailing, the Journal of Marketing Harold Maynard Award for the best article on marketing theory and thought, and the Marketing Science Institute/Journal of Marketing Research Award for the best research proposal in a competition for academic–practitioner collaborative research. She serves on the editorial review boards of Journal of Marketing, Journal of Retailing, Marketing Science, and Review of Marketing Science. She has also been an expert commentator on trade promotions for the Harvard Business Review.
Bari A. Harlam is Vice President of Marketing Intelligence at CVS Inc. Before joining CVS, Bari was on the faculty at the University of Rhode Island and Columbia University’s Graduate School of Business. She has published in various journals, including Journal of Marketing Research, Journal of Marketing, International Journal of Research in Marketing, and Journal of Business Research. She holds an undergraduate degree, a master’s degree, and a PhD from the Wharton School at the University of Pennsylvania.
Jacques César is a Director and member of the Management Committee of Mercer Management Consulting, where he heads Mercer’s global Pricing and Consumer profit unit. His work focuses on helping clients achieve customer-led transformations in mature retail and business-to-business environments through reengineering all elements of the customer offer (with particular focus on pricing, product offering, and marketing–manufacturing alignment). He has 22 years experience of consulting for clients primarily based in the United Kingdom and North America. Over this time, he has led many large assignments in industries as varied as retail, consumer goods, financial services, telecommunications, oil products, chemicals, paints and coatings, building products, electricity supply, rail, travel, and leisure. Jacques graduated from the Ecole Centrale des Arts et Manufactures in Paris with a Masters in Science. He also holds a BA in Economics from La Sorbonne and a joint MBA from Institut Superieur des Affaires, Paris, and Stanford University.
David Trounce is a Director in the Retail and Value Engineering Profit Unit at Mercer Management Consulting and works out of Mercer’s San Francisco and New York offices. He focuses on helping retail and consumer firms rapidly create and sustain significant sales and profit improvement by employing data-driven, customer-focused strategies and is an expert on pricing, promotions, customer-specific offers, in-market experimentation, data analysis, statistics, modeling, and consumer research. David has led multiple projects in several long-term relationships with U.S. and U.K. retail and consumer firms during his 11 years at Mercer and represents the RVE unit on Mercer’s North America Management Team. David holds a BA and an honorary MA in Mathematics and Computer Science from Cambridge University and holds an MBA from the Graduate School of Business at Stanford University, where he was an Arjay Miller Scholar.
J Marketing Research, Volume 43, Number 4, November 2006
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