HOW PROMOTIONS AFFECT SALES
February 9, 2005
In the last session we covered
1: Difference in Advertising and Sales Promotion
2: Different types of Sales Promotions i.e. trade promotion,
retailers promotion and consumer promotion
3: Expenses on sales promotion activities as a percentage of total
advertising expenses
4: Trends in Sales Promotion
5: Reasons of upward trends in sales promotion
6: Next topic is HOW PROMOTIONS AFFECT SALES
Promotions affects through four mechanisms
1: BRAND SWITCHING
2: REPEAT PURCHASING
3: PURCHASE ACCELERATION
4: CATEGORY EXPANSION
1: BRAND SWTICHING
The consumer is induced to purchase a different brand from
that which would have been purchased had the promotion
not been available.
Two types of effects of sales promotion:
1: Aggressive effect
Promotion induces the customer to buy a different brand
on the current purchase occasion than the brand he
bought on the previous occasion.
2: Defensive effect
Promotion of brand induce the consumer to buy the same
brand, rather than purchasing a different brand, which he
bought in the last purchase occasion
Not much difference between the two.
But it is important to know the specific objective of the promotion
i.e. to keep the current customers or to attract new ones.
RETAILERS PROMOTION
Manufacturer is concerned with “brand switching” but
retailer is more concerned with “store switching”
A consumer may respond to a retailer promotion by switching
store.
Relationship between store switching and brand switching
Switch to brand more likely to be available at a different
store.
New store may induce customer to use another brand because
the new brand is presented in two different purchase
environments.
Store Switching and Brand Switching can be related to each
other simultaneously.
Linear Attitude Model
By offering a price discount, promotions increase the
consumer’s overall attitude toward buying the brand.
The degree to which this occurs depends on (1) the size of
the discount and (2) the importance the consumer attach
to the low price. Clothing, computers, shoes
Utility-theoretic View – similar view of brand switching.
The price cut changes the nature of the budget constraint
faced by the consumer - may allow the consumer to buy a
brand which we could not afford earlier with normal price.
PTCO – Cigarettes, Split units
Linear Attitude Model and Utility-theoretic View do not explain
why nonprice promotions such as features and displays induce
brand switching.
Classical Conditioning Viewpoint – feature and displays may
induce brand switching because such promotions serve as
conditioned stimuli associated with price reduction.
Customer has been “trained” (or developed) to associate
features and displays with certain price, so responds to the
improved features and display even if a price reduction is
not offered. Cellular phones
Consumer Decision Making Model - high and low involvement
products provide important explanation for why nonprice
promotions may induce brand switching.
Low involvement products – will buy the brand most readily
available or the “most displayed” brand.
High involvement products – promotions can provide detailed
information for a particular brand (pamphlets and trial of sandwiches
prepared with margarine at HKB) or interrupt a well-reasoned intention
to buy a particular brand (display arranged for electronics)
7/13
Price Perception Theory – alternative forms of expressing a
price promotion can have different effects on brand switching.
Using SALE sign and “regular price” indication are critical.
How much customer is convinced that the price discount is
substantial.
BRAND A BRAND B BRAND C
On sale Regular Price Rs. 90 Regular price Rs. 90
Regular price Rs. 90
Sale price Rs. 75
Coupon for Rs. 15/=
Does the customer believe in regular price of brand A?
Evidence has proved that the customer will opt Brand B
At equal prices consumer will go for brand with coupon – pride
the consumer takes in proactively obtaining a lower price.
Perceived Risk Theory - new product/brand is offered with
reduced price to cover risk of brand changing for the consumer.
Premium to compensate the consumer for risking trial of the
new product.
Brand switching causes asymmetry in price cross-elasticities
BRAND 1 BRAND 2
High Quality Low Quality
High Price Low Price
Because of low price has higher
market share
Price reduction will attract
buyers using Brand 2
Further price reduction will not
attract buyers using Brand 1
Known as Theory of Price Tiers by Blattberg and Wisniewski
Brands in different price tiers would be expected to compete
asymmetrically with respect to price cuts.
2: REPEAT PURCHASING
Two types of repeat purchase effects
1: Purchase Effect
Purchase of a brand has implications beyond the immediate
purchase occasion. The consumer forms a habit for the brand,
sustains the habit or learns about the performance of the
brand.
2: Promotion Usage Effect
Change in purchase probability due to purchasing the brand
on promotion.
May weaken consumer perception towards the brand.
Decrease probability of subsequent buying the brand.
10/13
Purchase and Promotion Usage Effects on repeat purchasing
can occur simultaneously.
Consumer purchases a brand on promotion;
Due to habit formation, likely to buy again
But “probability” of buying again is lower because purchase
of brand on promotion lowered the value of the brand in the
eyes of the consumer.
Repurchase effect due to promotion on durable goods means
something extra.
You buy a Dawlance refrigerator on promotion, the refrigerator
gave satisfactory service; you will go for Dawlance micro-wave
and other kitchen utilities.
*
Two conflicting theories regarding promotion usage repeat
Purchase effects are (1) Operant Conditioning and
(2) Attribution Theory.
Operant conditioning - promotion is a reward that enable
the customer to continue buying the product.
Attribution theory – After buying the brand on promotion, the
consumer feels that he bought the brand only because it was
on promotion. Once promotion is over, there is no reason to
buy the brand again.
The brand is perceived as a lower quality brand.
*
Various studies support both purchase effect and promotion
usage effect on repeat purchasing.
Purchase effect is expected to be positive.
Promotion usage effect, is it positive or negative?
Purchase effect may not work for high involvement products
because the customer known a lot about alternative brands.
(Example of consumer durables)
Promotion usage effect may not be strong if the consumer
evaluate a product while using the same and is satisfied with
the performance.
