Expert Systems with Applications 38 (2011) 55445552

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Expert Systems with Applications

journal homepage: www.elsevier.com/locate/eswa

Identifying the underlying structure of demand during promotions: A structural

equation modelling approach
Usha Ramanathan a,, Luc Muyldermans b
a
Newcastle Business School, City Campus East, Northumbria University, Newcastle Upon Tyne NE1 8ST, UK
b
Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, UK

a r t i c l e i n f o a b s t r a c t

Keywords: It is widely recognized that promotions enhance product sales. Other factors such as seasonality, special
Demand-factor model days, customer preferences and economic factors may also have an impact on demand. Yet, endeavours to
Structural equation modelling model the dependency of demand on various factors are scarce. We develop a conceptual demand-factor
Information exchange model to represent the dependency of demand on these factors. We examine and validate the conceptual
Supply chain collaboration
model through structural equation modelling, using sales data of a leading soft drink company involved
in supply chain collaboration with downstream retailers. We nd that promotional and seasonal factors
have a large and direct impact on sales, while special days like festivals and bank holidays have limited
inuence. Our approach is versatile and can assist demand planners in understanding the demand during
promotional events, and in the planning and execution of promotional deals.
2010 Elsevier Ltd. All rights reserved.

1. Introduction
Supply chain collaboration and information exchange are key
elements of success in many businesses such as Wal-Mart, Proctor
& Gamble and West-Marines (Ireland & Crum, 2005). Collaborative
planning, forecasting and replenishment (CPFR) is one framework
that integrates suppliers and buyers. It encourages collaborating
partners to exchange information for increased transparency
throughout the supply chain (VICS, 2004). But, the level of informa-
tion exchange required is highly dependent on the businesses
involved in collaboration. Some businesses require limited infor-
mation such as inventory levels and historical sales data for plan-
ning. Others may need additional details such as promotional
calendars and pricing information at retailer outlets. The depen-
dency on such information makes supply chain collaboration
(SCC) more essential, and the level of SCC is directly reected in
the extent of joint planning activities required.
The structure of demand is one of the important characteristics
to decide on the level of collaboration and information exchange.
Therefore, it is essential to identify the reasons behind demand
for a particular product at a particular time. Normally, functional
products (e.g., detergents, shampoo, soft drinks) will have low de-
mand and supply uncertainties compared to innovative products
(e.g., computers, video games, mobile phones) (Fisher, 1997; Lee,
2002). But this is not always the case, especially when promotional
Corresponding author. Tel.: +44 7726732156.
E-mail addresses: Usha.Ramanathan@northumbria.ac.uk (U. Ramanathan), Luc.-
Muyldermans@nottingham.ac.uk (L. Muyldermans).
deals are in place. For example, the demand for soft drinks can be
much higher during promotions than at normal (non-promotional)
periods. In such cases, supply chain collaboration (and CPFR in par-
ticular) may help to avoid excess inventory and stock-outs. In
CPFR, information from different supply chain parties (such as pro-
motional calendars, inventory levels and point of sales data) is
shared so as to improve forecasting and to facilitate timely replen-
ishment. Sharing of demand and inventory information with up-
stream members helps in reducing supply chain costs (Cachon &
Fisher, 2000; Chen, 1998; Gavirneni, Kapuscinski, & Tayur, 1999;
Lee, So, & Tang, 2000; Raghunathan, 2001). This is also evident
from Wal-Marts Retail-link, an exclusive network to share real
time sales data with other partners in the collaboration (Ireland
& Crum, 2005).
Although supply chain collaboration and advanced information
technology have given a certain amount of leverage to coordinate
and improve production and replenishment, demand forecasting
is still a big issue in the area of supply chain management. Collab-
orative forecasting, by combining relevant information from differ-
ent supply chain partners, is one of the potential avenues to
improve forecast accuracy (Aviv, 2001). Various external and inter-
nal factors make forecasting of promotional sales a challenging
task. Hence identifying the underlying structure of demand is
important.
In this study, we use the concept of supply chain collaboration in
the context of information exchange and promotional planning and
forecasting. We begin by developing a conceptual demand-factor
model for the underlying structure of demand. Then, we empirically
examine whether the developed constructs really represent prod-

0957-4174/$ - see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.eswa.2010.10.082
 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552
uct sales. In our study, we use sales data of different soft drinks over
a time period of 36 months. We also use some publicly available
information in our model. Our study makes an important contribu-
tion to the literature through the development of an empirical de-
mand model and identifying its underlying factors. This attempt
is the rst of its kind in the literature. Because our approach reveals
the signicant variables and their inter-relationships, an interesting
extension is to use these factors in causal forecasting methods. This
in turn, may assist demand planners in producing more accurate
forecasts for promotional events.
The remainder of the paper is organised as follows. Section 2 re-
views the literature on supply chain collaboration and promotional
forecasting. Section 3 describes our case study company a major
soft drink manufacturing company located in the UK. Its current
supply chain collaboration practices for promotional events help
us to develop a conceptual model and also to propose four research
hypotheses. Section 4 describes the research approach, including
data description, measurement model and structural equation
models. Section 5 discusses the results of our analysis, and con-
cludes with future research ideas.
2. Supply chain collaboration for improved forecasting
Supply chain collaboration has a rich and wealthy literature
dealing with many aspects of different supply chain processes.
Information exchange in the supply chain focuses mainly on two
areas. One is production and replenishment, and the other is fore-
casting and planning. Either cost reduction or inventory control are
the primary motive of these supply chain collaborations (Cachon &
Fisher, 2000; Chen, 1998; Kulp, Lee, & Ofek, 2004). As our research
aims to establish the relationship between sales and the underly-
ing factors, our literature study focuses on articles dealing with
supply chain collaboration and information exchange for the pur-
pose of demand planning.
Many researchers consider information exchange in the supply
chain as vital for improving performance (Byrne & Heavey, 2006;
Cachon & Fisher, 2000; Lee et al., 2000). In this line, a special issue
of the Management Science journal on Marketing and Operations
Management Interfaces and Coordination debated various issues
common to both the elds of operations management and market-
ing, and having sales information as the main focus. While some
authors illustrated that point of sales (POS) data is important infor-
mation across the supply chain, others doubted its role for demand
forecasting. For example, while Kulp et al. (2004) integrated differ-
ent forms of information and knowledge to evaluate supply chain
performance, Steckel, Gupta, and Banerji (2004) questioned the
importance of POS information. They argued that POS information
may distract decision makers particularly if product demand was
highly uctuating. However, executing promotions at retail outlets
usually requires intense collaboration between the manufacturer
and the retailers (Ailawadi, Beauchamp, Donthu, Gauri, & Shankar,
2009; Aviv, 2007) and different data may be needed in different
phases of the planning/execution process: whereas the demand
during promotional events can be predicted based on historical
sales data and information about the promotional deals run by
the stores, the replenishment phase typically requires inventory
status and recent POS information in order to avoid stock-outs or
excess inventory.
Analytical models developed by Aviv (2001, 2007) showed sup-
port for sharing sales information and forecasts between retailers
and manufactures to improve forecast accuracy. It was also dem-
onstrated that the overall supply chain performance was higher
with high quality centralized information (Forslund & Jonsson,
2007). A recent article of Paulraj, Lado, and Chen (2008) empha-
sised the importance of inter-organizational communication for
5545
relational competency in SCC. Although many of these articles
are from the discipline of operations management, they do not ex-
plain the relationship between demand and its inuencing factors
in a great extent. This was also evident from the recent review pa-
per on supply chain coordination (Arshinder and Deshmukh,
2008).
In the past two decades some analytical models assessed cus-
tomer responses to various types of promotions, including price
discounts with advertisement, on-shelf discounts without adver-
tisement and coupon discounts (Cooper, Baron, Levy, Swisher, &
Gogos, 1999; Raju, 1995). A recent review article by Fildes, Niko-
lopoulos, Crone, and Syntetos (2008) cited some interesting articles
from the Marketing literature, which relate demand and its under-
lying causal factors in the context of forecasting. In an attempt to
forecast the effect of promotions, Cooper et al. (1999) identied
that the display location of items in the stores had a positive im-
pact on sales, whereas a longer duration of the promotional deal
(with major display) had mixed effects on sales, especially for slow
moving items. Several attempts have been made to estimate the ef-
fect of promotions and price discounts on sales using store level
data (Abraham & Lodish, 1987; Blattberg & Levin, 1987; Naik,
Raman, & Winer, 2005) and market level data (Ali, Sayn, Van
Woensel, & Fransoo, 2009; Christen, Gupta, Porter, Staelin, & Witt-
ink, 1997; Dube, 2004). Dubes econometric model for consumers
purchase pattern related the time of buying and the time of
consumption. Divakar, Ratchford, and Shankar (2005) developed
CHAN4CAST, a sales forecasting decision support model incorpo-
rating several variables (trend, promotional variables, seasonality,
holidays and temperature). The authors considered channel level
data, combining a variety of products. Recently demand forecasting
in the presence of promotions was discussed by Ali et al. (2009).
They supported detailed input data with advanced techniques to
improve forecast accuracy in comparison with standard linear
regression models. Almost all of the above mentioned literature
concentrated more on forecasting rather than identifying the
underlying demand variables and their relationship to sales.
We build our research based on the previous work of Divakar
et al. (2005) by trying to understand how different demand factors
inuence sales using structural equation modelling (SEM). SEM
(see e.g., Hair, Black, Babin, Anderson, & Tatham, 2006) is a multi-
variate statistical analysis technique, which can be used to estab-
lish and test the causal relationships between various latent
constructs. Latent constructs are variables that cannot be mea-
sured directly, but which are estimated through other measurable
indicator variables. For example, one of the latent constructs in our
structural equation model is called promotional factors and this
construct is measured through variables such as price discount
and the duration of the promotional event. SEM is a relatively
new approach in the eld of operations management and forecast-
ing, but some researchers have used this technique to nd relation-
ships between different groups (suppliers and buyers) or
departments (marketing and operations) in analysing a rms per-
formance (Mishra & Shah, 2009). Our proposed SEM was developed
using weekly sales data of different products (2 l pet bottles dif-
ferent avours) of a leading soft drink company in the UK. The data
were not at the store level, but involved the aggregated sales vol-
umes among all stores of major retailers in the UK.
3. Case study soft drink manufacturing company
3.1. Case study research
We have chosen a case study approach to identify different fac-
tors of demand. We conducted our study with a leading soft drink
manufacturing company (SDM) in the UK. SDM practices CPFR
5546 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552
with most of its retail customers for promotional events. Every
year SDM produces and distributes about 240 million cases of soft
drinks. The product portfolio of the company includes pet bottles
of 2 l, 1.5 l, 500 ml and 330 ml cans. For our study we contacted
the Customer Logistics Ofce, which looks after the largest 400
customers, including main grocery retailers, wholesale customers,
national retail outlets and main brewers.
The case-study approach included company visits and semi-
structured interviews with managers and demand planners
responsible for sales, forecasting and promotional plans. We left
the questions for the interviews as provisional and updated on
completion of each stage of the study as our research was explor-
atory in nature (Voss, Tsikriktsis, & Frohlich, 2002). In fact, this ap-
proach was very versatile to capture the interesting points on
promotional planning and forecasting, and information exchange
between SDM and the retailers. Our goal during the interviews
was to understand SDMs promotional planning and forecasting
approach as well as to identify various factors that may impact
on the sales during promotional events. SDMs promotional plan-
ning and forecasting processes are briey described below.
3.2. Promotional planning and forecasting at SDM
The sales of soft drinks (and other functional products) in the
UK are heavily dependent on the promotional deals run by the
retailers. Approximately 60% of SDMs sales volume is achieved
during promotional events. In the past ve years, SDM had en-
gaged in collaborative planning, forecasting and replenishment
(CPFR) with the largest retailers. SDM discusses promotional plans
with their customers and develops a promotional calendar for each
retailer. The promotional calendar shows the products (or product
families) on promotion, the timing and duration of the promotions,
the types of promotions, the price discounts, the promotional dis-
plays and possibly other promotional features.
SDM normally offers the same type of promotion at the same
time to all different avours within the same product family. For
example, if a 2-for-2.50 promotion is planned for 2 l cherry
drinks, then this promotion is also offered for 2 l strawberry drinks.
The timing of a promotional deal is specied by xing the starting
week and the number of weeks the deal runs in the stores. Typi-
cally, the company offers promotions for 25 times a year, while
each deal lasts for 15 weeks. The types of promotion differ widely
across various retailers, and include: half-price, buy-one-get-one-
free (bogof), buy-2-get-2-free, 2-for-x, 3-for-x, and save x. Each
of these deals can be converted into a percentage discount on the
normal (non-promotional) sales price. Promotions such as half-
price and bogof have the highest price discount (50%) and result
in steep increases in the sales volume. The display of the products
on promotion can also have an impact on the sales. Products can be
displayed at gondola end, end aisle, side aisle, plinth, stack, etc. The
gondola end display is at the end of a major aisle in the store and
with a prominent sign board. This display captures maximum
attention from potential buyers. Other promotional features in-
clude in-store advertisements (sign boards, sports features with a
product logo, etc.) and media advertisements outside the stores
(on the radio, television and in magazines). All the above promo-
tional elements may result in an increase of sales over the normal
base sales. The increase in sales can be captured using a measure
called sales uplift, dened as the ratio of the average sales volume
during a promotional event and the average normal sales level
when no promotion is offered. Information on promotions can be
termed as internal to SDMs supply chain or under control of
the supply chain partnership. All these promotional elements will
be grouped in a single latent variable called promotional factors
(PF) in our conceptual demand-factor model and structural equa-
tion model (see Section 4).
From discussion with SDM managers, it was also clear that the
collaboration with the retailers was much more intense during
promotional events. Under normal circumstances (no promotions)
the sales of soft drinks appeared to be rather stable (apart from
for some products seasonal uctuations during summer). Auto-
matic replenishment systems can handle these situations very
well. But, promotions may heavily distort the normal demand
prole. For example, bogof and half price promotions could easily
uplift the sales of 6-packs of 330 ml cans of a popular soft drink
by a factor 30 or more. SDMs customer demand analysts forecast
the sales for each promotional event using the promotional calen-
dar and the historical performance of similar deals. This was (and
still is) a non-automatic, time-consuming process and no specic
forecasting models (e.g. causal models) were used. During a pro-
motional event, the actual sales (POS) and inventory levels are
monitored closely to make sure that the right amount of products
are deployed in the distribution network in order to prevent stock-
outs.
3.3. Conceptual demand-factor model
Apart from the promotional elements discussed in Section 3.2,
there are other factors such as weather and temperature, Christ-
mas and holiday periods, which may impact on sales. These factors
are external to the supply chain and hence difcult or impossible
to control by the supply chain members. The external factors are
represented by three constructs. The rst, customer preferences
(CP) includes preferences of customers for certain products (fast
or slow moving products) and life cycle aspects (i.e., whether the
product is an established product or a new product). The second,
special days (SD) includes holiday periods, bank holidays and ma-
jor festivals (Christmas and Easter); and the third, seasonal factors
(SF) includes temperature and time in the year. These four factors
may act independently or inter-dependently in realizing the actual
sales. This idea of relating promotional factors and non-promo-
tional factors with the actual sales performance is represented con-
ceptually in Fig. 1.
The four factors may or may not be required to explain the de-
mand of all soft drinks. The objective of this research is to uncover
the relationships between the different factors and the overall
sales performance. It is also important to mention that there may
or may not be a relationship between these four constructs. At this
stage, we hypothesize the following four relationships:
Hypothesis 1. Promotions have a direct positive impact on sales.
Hypothesis 2. Customers preferences for product are directly
related to sales.
Hypothesis 3. Special days have a positive impact on sales.
Hypothesis 4. Seasonal factors have an impact on the sales of soft
drinks.
These four hypotheses are very much in line with the general
belief and common sense. There is strong support in the literature
for some of the hypotheses, and in particular for Hypotheses 1 and
4. Many causal (regression) models do incorporate explanatory
variables to model different promotional aspects (type, price dis-
count, duration and type of display) and usually, stronger promo-
tional mechanisms result in a larger sales uplift (see e.g., Cooper
et al., 1999). Regarding Hypothesis 4, there is evidence in the liter-
ature (Ailawadi et al., 2009; Sun, 2005) that even similar products
are valued differently at different points in time. In addition, there
is strong support that the sales of soft drinks are higher when the
weather is hot (see e.g., Cooper et al., 1999; Dube, 2004). Hypothe-
sis 2 is based on the fact that some products have a higher demand
than others (fast vs. slow moving items) and that customers may
respond differently to newly introduced products compared to
 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552
Fig. 1. Conceptual demand-factor model.
well-established avours. Finally, Hypothesis 3 tests whether spe-
cial days such as Christmas, Easter or other holidays have an im-
pact on sales.
4. Model construction
4.1. Data description and analysis
SDM observes electronic point of sales data (EPOS) from its cus-
tomers. We consider three years of sales data (20052007) of 10
different soft drinks (different avours) in 2 l pet bottles, sold
through three major retail chains in the UK. The data are used
for studying the impact of demand factors on the actual sales vol-
ume but not for studying the changing interests of buyers. Sales
volume is used as the endogenous variable to measure sales perfor-
mance in our structural equation model. All the demand factors as
specied below (promotional factors, special days, seasonal factors
and customer preference) are exogenous variables.
We measure the latent construct promotional factors (PF)
through four indicator variables: type of promotion (PF1), size
and/or display of promotion (PF2), duration of the promotional
event (PF3) and price discount (PF4). The different types of promo-
tions (PF1) are scored against a scale of 1-to-5, with the strongest
mechanism having the highest score: save x% (score 1), 3-for-x
(score 2), buy 2-for-3 (score 3), 2-for-x (score 4), and bogof
(score 5). In a similar way, the size and/or display of a promotion
(PF2) is scored against a 1-to-5 scale, with the highest score cor-
responding to the most prominent display location. The size of a
promotional event relates to the number and/or type of retail
stores that run the promotional deal. For example, the display in
smaller stores can be on the shelf (score 1), end aisle (score 2) or
gondola end (score 3), whereas the display on shelf and gondola
end at mega-stores is scored as 4 and 5 respectively. The duration
of a promotional event (PF3) ranges from one to ve weeks and is
also measured on a 1-to-5 scale. The price discount (PF4) is mea-
sured on a continuous 0-1 scale (with 0 corresponding to no price
discount and 1 corresponding to a 100% price discount).
We measure the second latent construct customer preferences
through two variables: product rank (CP1) and new or established
product (CP2). Product rank is measured on a 1-to-5 scale: the dif-
ferent avours are ranked according to their annual sales volumes,
and the top selling avours receive a score of 5, whereas the slow-
est moving avours receive a score of 1. CP2 is measured on a
dichotomous 0-1 scale, with 1 for established products and 0
for new products.
We measure the third latent construct special days (SD)
through two variables: major festivals such as Easter and Christ-
mas (SD1) and other special days including bank holidays, back
to school, and mothers day (SD2). Both these variables are mea-
sured on a dichotomous 0-1 scale.
We measure the fourth latent construct seasonal factors (SF)
through two variables: average temperature (SF1) and week in
5547
the year (SF2). The average (historical) temperature was collected
from the MET ofce and is measured on a continuous scale. The
week in the year is represented by an integer number between
1 (rst week) and 52 (last week).
We have initiated the data analysis using the sales of different
soft drinks (2 l bottles) sold through one of the retail chains. The
data matrix was checked for coding errors. In case of any mismatch
of sales gures and promotional events (as specied on the promo-
tional calendar), it was corrected through discussion with the key
informant at SDM (see Voss et al., 2002). The data used in our anal-
ysis can be considered as error free and complete (weekly sales
data for the years 20052007) with ten variables. Table 1 reports
the descriptive analysis results namely, mean, standard deviation
(SD) and correlation matrix of the data.
The four promotional variables are signicantly correlated to
each other at p < 0.01 level. The correlation values vary between
0.26 and 0.80. This shows that each of the variables under the con-
struct promotional factors is representing a different characteristic
of the promotional event. The non-promotional construct cus-
tomer preference has two correlated variables: product rank and
new/established products. It is important to note that these two
variables are not correlated to any other variables of the other
three constructs. The next non-promotional construct special
days has two variables: festivals and other holidays. These two
variables are signicantly correlated at p < 0.01 level with correla-
tion value 0.39. The festivals and the holidays are signicantly cor-
related with the duration of the promotional event (PF3), with a
value of 0.13 and 0.10, respectively at p < 0.01. The last non-pro-
motional construct seasonal factors has two variables tempera-
ture and week-in-year. Both these variables are correlated with
value 0.18. Temperature has a high signicant correlation with size
of promotion and price discount. But, temperature has a negative
correlation with festivals and holidays. The negative correlation
shows that the main festivals in the UK are happening during sea-
sons with lower temperature.
4.2. Structural equation modelling
We use structural equation modelling (SEM) for exploring the
relationships between the different factors and their impact on
sales performance (see Fig. 1). SEM follows a two steps approach
(Anderson & Gerbing, 1988) constructing the measurement model
and constructing and testing the structural model. Measurement
and structural models are usually represented by diagrams (see
Figs. 24). The measurement model deals with the relationships
between measured input variables and the latent constructs (PF,
SD, SF and CP). Principal component analysis was conducted to
identify and conrm the different factors under each construct in
our conceptual model. We used SPSS 15 for exploratory factor
analysis (EFA) and for conrmatory factor analysis (CFA). In stage
two, we test the relationships between these constructs and sales
performance, which is measured through sales volume. We used
5548 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552

Table 1
Descriptive statistics of rst order observed variables.

Variables Mean SD PF1 PF2 PF3 PF4 CP1 CP2 SD1 SD2 SF1 SF2
PF1 promotion type 1.47 1.68 1
PF2 size of promotion 0.33 0.75 0.54* 1
PF3 duration of promotion 1.28 1.76 0.72* 0.26* 1
PF4 price discount 0.14 0.18 0.80* 0.74* 0.59* 1
CP1 product rank 3.73 1.67 0.03 0.01 0.04 0.03 1
CP2 New/established 0.57 0.5 0.01 0.03 0.03 0.01 0.87* 1
SD1 festivals 0.02 0.14 0.06 0.06 0.13* 0.02 0.07 0.01 1
SD2 other holidays 0.12 0.33 0.04 0.07 0.10* 0.02 0.03 0.01 0.39* 1
SF1 temperature 13.27 4.92 0.02 0.30* 0.10* 0.22* 0.01 0.02 0.17* 0.09** 1
SF2 week-in-year 26.81 15.11 0.05 0.01 0.08** 0.06 0.02 0.02 0.23* 0.07** 0.18* 1

n = 826 observations.
*
Correlation is signicant at the 0.01 level
**
Correlation is signicant at the 0.05 level.

(a) Conceptual measurement model (b) Inital model

PF1 PF1
0.915*

0.748*
PF2 PF2
Promotional Promotional
factors - PF 0.761* factors - PF
PF3 PF3
0.936*

PF4 PF4

CP1 Customer 0.07***

preferences -
CP
CP2

SD1 SD1 0.833*

-0.21***
Special days - Special days -
SD 0.841* SD
SD2 SD2
-0.24**

SF1 SF1 0.769*

Seasonal Seasonal
factors - SF 0.780* factors - SF
SF2 SF2

*** - significant at p < 0.10

** - significant at p < 0.05
* - significant at p < 0.01

Fig. 2. (a) Conceptual measurement model and (b) initial model.

the software Amos 16 for developing the structural equation mod-
els and to assess the overall t using the maximum likelihood
method. Three different data sets corresponding to different retail
chains were used.
4.2.1. Stage 1: Measurement model construction and validation
We have formed four latent constructs from 10 observed vari-
ables: promotional factors (PF), customer preferences (CP), special
days (SD), and seasonal factors (SF). The conceptual measurement
model is shown in Fig. 2a.
Principal component analysis was conducted to identify the
number of groups formed in these variables. To validate the
groups, the varimax rotation method with Kaiser normalization
was applied. An eigenvalue of one or more identies the factors.
Any element with a factor loading smaller than 0.4 was not consid-
ered for further analysis as it will not measure a specic construct
(Hair et al., 2006). The results of the explanatory factor analysis
(EFA) are shown in Table 2. The total variance explained in EFA is
68.28%. This represents the amount of stability of the constructs.
Conrmatory factor analysis (CFA) was conducted to conrm
the factors under each latent variable and an initial model was
developed (Fig. 2b). The CFA results are shown in Table 3.
Three latent constructs (promotional factors, special days and
seasonal factors) are highly signicant at p < 0.01 level, whereas
the construct customer preferences fails the Bartlett test of sphe-
ricity (not signicant) although KaiserMeyerOlkins (KMO) mea-
sure of sampling adequacy has a value of 0.5 (Hair et al., 2006).
Hence, we considered dropping this factor from our analysis. (Cus-
tomer preference (CP1) has a signicant high correlation with sales
volume, and we will re-introduce this variable in our later struc-
tural models (see Figs. 3 and 4)).
CFA analysis conrmed the signicance of the entire path be-
tween observed variables and rst order latent variables with
p < 0.01. The construct validity of our model is explained through
the percentage of variance extracted (Fornell and Larcker, 1981).
The total variance explained by each construct is in the range of
5271% (see Table 3). The reliability of the constructs was veried
through the Cronbach alpha a = 0.63. Here, a Cronbach alpha
 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552 5549

-0.09**

0.004

0.43*
-0.23*

Fig. 3. Test structural equation model.

Fig. 4. Complete structural equation model.

value P 0.60 is valid in our exploratory case. Hence, we claim that
both the construct validity and the construct reliability are satis-
factory. We have further tested our constructs for discriminant
validity to check how each construct is distinct from the others
(Anderson & Gerbing, 1988). Since none of the inter-correlations
among the three constructs contains 1.0, we conclude that each
construct is distinct. The initial model, including the covariance
relationships between the three latent constructs, is shown in
Fig. 2b.
4.2.2. Stage 2: Construction and testing of structural equation models
Structural theory is a conceptual representation of relation-
ships between constructs. In Section 4.2.1 we constructed a
measurement model with four latent constructs to identify the
5550 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552

Table 2 chi-square (v2/df), comparative t index (CFI), goodness of t in-

Exploratory factor analysis. dex (GFI), incremental t index (IFI), Trucker Lewis index (TLI)
Constructs Variables Factor loadings and root mean square error of approximation (RMSEA) at 90%
Promotional factors PF1 0.913 condence interval (CI). Table 4 gives a brief description of these
PF2 0.727 t indices (Hair et al., 2006).
PF3 0.776 We rst evaluated the measurement model (Fig. 2), which con-
PF4 0.932 siders rst order latent constructs and observed variables. In this
Customer preferences CP1 0.737 model (Fig. 2b) three rst order constructs correlate with each
CP2 0.699 other. The models t indices are acceptable which is reected in
Special days SD1 0.835 the signicant factor loadings. The models t has GFI = 0.988,
SD2 0.724 CFI = 0.989, v2 = 45.42 with df = 18, normed v2 = 2.52, IFI = 0.990,
Seasonal factors SF1 0.792 TLI = 0.979 and RMSEA = 0.043 at 90% CI. This model performed ex-
SF2 0.629 tremely well in terms of the suggested level of t in empirical re-
search (Shah & Goldstein, 2006).
Then, we tested the measurement model linked with sales
Table 3 performance the latter being measured through sales volume.
Conrmatory factor analysis (factor loading). In this model, all rst order constructs except customer prefer-
Constructs Variables Factor loadings Total variance
ence were found signicant. In customer preferences, CP1 (prod-
explained (%) uct rank) was signicant but not CP2 (new or established
product). The model was then re-tested after dropping the ob-
Promotional PF1 0.915 71.32
factors PF2 0.748 served variable CP2. The resulting model t (Fig. 3) has normed
PF3 0.761 v2 = 3.379, GFI = 0.981, CFI = 0.983, RMSEA of 0.052 at 90% con-
PF4 0.936 dence interval (0.041, 0.067), IFI = 0.983, and TLI = 0.968. This t
Customer CP1 0.723 52.31 index is well under the suggested t (Kline, 1998). In this model,
preferences the covariance relationships between latent constructs PFSD
Special days SD1 0.833 70.05 and SDSF are signicant at p < 0.05 and p < 0.01, respectively.
SD2 0.841 The negative correlation of 0.09 between the constructs promo-
Seasonal SF1 0.769 59.99 tional factors and special days shows that these two aspects are
factors SF2 0.780 not planned or occurring at the same time. In other words, not
n = 826 observations; p-value < 0.01 for all factor loadings. many promotions are executed during holidays. Similarly, the
correlation between SD and SF is 0.23. This shows that good
weather conditions or high temperature and important festivals
Table 4
(Christmas and Easter) are not occurring at the same time in
Description of t indices. the UK.
After removing the (non-signicant) covariance relationships
Fit Description Suggested
index cut-off
between PF and SF, the model t has not changed much. The
resulting model t has normed v2 = 3.379, GFI = 0.981,
v2/df Normed chi-square: chi-square divided by degree of <4
CFI = 0.983, RMSEA of 0.054 at 90% condence interval (0.041,
freedom
0.067), IFI = 0.983, and TLI = 0.968.
CFI Comparative t index: compares the model t with a >0.90
baseline model
Next (see Fig. 4) we also remove the covariance relationships
between PFSD and SDSF (though signicant with small path
GFI Goodness of t index: indicates how well the model >0.90
reproduces the covariance matrix among the
coefcients). We note that the missing covariance relationships
observed variables PFSD and SDSF do not affect the t apart from a small change
IFI Incremental t index: group of goodness of t indices >0.90
in the path coefcients between SD and sales performance, and be-
that assesses how well a specied model ts relative tween SF and sales performance. Hence, it is clear that the inter-
to some alternative baseline model relationships between the rst order latent constructs are not
TLI Trucker Lewis index >0.90 highly inuencing the sales performance of 2 l bottles.
RMSEA Root mean square error of approximation <0.07
The model t has normed v2 = 3.741, GFI = 0.976, CFI = 0.978,
RMSEA of 0.058, IFI = 0.978, and TLI = 0.963. This t index is
again well under the suggested t. This model is considered as
a complete structural model for 2 l bottles. The R2-value of this
interrelationship between promotional and non-promotional fac- t is 0.748. In the structural model (Fig. 4) the promotional fac-
tors. In this section, we investigate the relationships between the tors have direct positive impact on the sales with path coef-
rst order constructs and sales performance, which is measured cient of 0.79 at a signicance level p < 0.01. Also, SD and SF
through sales volume. Figs. 3 and 4 show the initial and nal have a positive impact on the sales performance. The customer
structural equation model. We discuss these models and how preference factor CP1 has a positive path coefcient of 0.43 at
they were derived below. The models t is evaluated by normed signicance level p < 0.01.

Table 5
Fit indices for three different data sets.

v2 (df) Normed v2 GFI CFI RMSEA (90% CI) IFI TLI

Data set 1 101.01 (27) 3.741 0.976 0.978 0.05 (0.04, 0.07) 0.978 0.963
Data set 2 121.36 (27) 4.495 0.978 9.978 0.05 (0.04, 0.06) 0.978 0.964
Data set 3 157.09 (25) 5.818 0.964 0.959 0.07 (0.06, 0.08) 0.959 0.932
 U. Ramanathan, L. Muyldermans / Expert Systems with Applications 38 (2011) 55445552
Finally, to validate our model, we performed tests using differ-
ent samples from the same population. We used sales and promo-
tional details from three different retail chains. The model ts were
acceptable using these three different sets and the t indices are
shown in Table 5. The good model ts provide good support for
our conceptual demand-factor model.
5. Discussion and conclusion
The measurement model (Fig. 2) was just a representation of
covariance relationships between the latent constructs. Hence, it
could not be considered as a complete model (Mishra & Shah,
2009). In our test structural equation model (Fig. 3), we linked
the measurement model with sales. However, we rejected this
model because there was no signicant correlation between pro-
motional factors and seasonal factors. Hence, there is no need to
model this link. Both promotional factors and seasonal factors do
have a positive impact on sales (as indicated by the positive path
coefcients between PF-sales performance and SF-sales perfor-
mance in Figs. 3 and 4). In the test model (Fig. 3), there are
small (but signicant) negative path coefcients between PF
SD and SDSF. The negative correlation ( 0.23) between special
days and seasonal factors may be justiable in the UK context as
both Christmas and Easter do not match with periods of high
temperature. The very small negative correlation ( 0.09 signi-
cant at p < 0.05) between special days and promotional factors
only shows that promotions not necessarily occur on special
days. However, the positive path coefcient between SD-sales
performance does indicate that the sales of soft drinks is higher
during holidays and festivals. This is in line with previous re-
search ndings (Cooper et al., 1999; Divakar et al., 2005; Dube,
2004). We eliminated the covariance relationships among three
rst order latent constructs in the nal model (Fig. 4). Still we
nd a direct signicant impact of PF, SD and SF on sales. Hence
we can conclude that Hypotheses 1, 3 and 4 are supported. Fur-
thermore, customer preference (here represented by product
rank CP1) has a signicant positive factor loading of 0.43. This
provides support for the second hypothesis.
The purpose of this paper was to identify the underlying
structure of demand during promotional events by identifying
the signicant explanatory factors. We applied structural equa-
tion modelling for this purpose. SEM is a multivariate statistical
analysis technique, which looks for relationships between vari-
ous constructs. Our SEM model links sales performance with four
latent constructs (promotional factors, seasonal factors, special
days and customer preferences), each measured through a num-
ber of indicator variables. Sales performance was measured by
sales volume (exogenous variable). We have tested the SEM
model for one family of products (2 l bottles) sold through three
different retailers, using the data from a leading soft drink man-
ufacturer in the UK. We believe that decomposing the promo-
tional sales in its underlying explanatory factors through SEM,
is an interesting new approach to gain more insight in the struc-
ture of demand and to assist managers in promotional planning.
SEM also reveals the signicant variables and their inter-
relationships. Hence, an interesting extension is to use these fac-
tors in causal forecasting methods. Another interesting extension
is to test the SEM models for different product families (e.g. 6-
packs of 330 ml cans and 500 ml bottles). This could reveal dif-
ferent demand structures for different product families (e.g.,
500 ml bottles are impulse buy products and their sales are
much more impacted by the local weather). Our SEM models
can be modied to study the moderating and mediating effect
of certain factors (e.g., are promotions more effective during
periods of high temperature?), or extended by incorporating fac-
5551
tors such as cannibalisation/competition, economic factors (ina-
tion or recession), and whether the retail stores execute the
promotions properly. Another interesting extension is to mea-
sure sales performance by other or different metrics (e.g., sales
revenue and prot).
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