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Who Benefits from Price Promotions?

Price cuts boost sales and traffic. So where are the long-term gains?
by Shuba Srinivasan, Koen Pauwels, Dominique Honssens, and Marnik Dekimpe

Retailers and manufacturers have come to rely levels. And for retailers, promotions can often do
on price promotions, routinely using coupons, more harm than good. A Coke promotion, for in-
two-for-one offers, and temporary price cuts to stance, may actually depress a supermarket's
lure customers into stores and boost sales. But overall soft-drink revenues as Pepsi drinkers
most promotions have only fleeting effects. Re- temporarily shift to the cheaper brand. Or an
search clearly shows that after a promotion runs electronics retailer may find that buyers refuse
its course, customers quickly return to their old to purchase a heavily promoted television once
buying patterns and sales drop back to normal it returns to its higher price.
So do price promotions pay off?
Cheese Log: To answer that question, we ana-
Change in manufacturer's revenue
A Promotion's lyzed seven years of scanner data,
Fleeting Effect Si 20.000
covering 25 product categories and
100,000 75 brands, from the Chicago area's
A one-week price cut often immediate effect
80,000 second-largest supermarket chain,
cents per ounce on a national
60,000 Dominick's Finer Foods. Previous
brand of cheese produces research showed that price promo-
40,000 dust-settling effect persistent effect
short-term revenue effects tions tend to have little long-term
that differ markedly for retailers 20,000
effect on sales volume. Our new re-
and manufacturers. But when 0 search found that the same is true
' I
the promotion ends, revenues -20,000 12 15 18 24 for revenues and margins: They
quickly snap back to baseline, -40,000
quickly snap back to baseline. But
where they remain. in the short-to-medium term, pro-
motions can have very strong posi-
tive and negative effects that can
Change in retailer's revenue hit retailers and manufacturers in
$0 very different ways.
A typical cheese promotion of-
fers a good example. For a week,
the retailer reduced the price of
persistent effect
\ a branded cheese product by ten
dust-settling effect
cents an ounce. We tracked the
economic impact of the promo-
tion through three periods; imme-
diate effects, measured during the
week of the promotion itself; "dust-
immediate effect settling" effects, which continued
until aboutthe sixth week; and per-
12 15 18 24 sistent effects, which we measured
weeks out to 26 weeks. (See the exhibit


Q_U_Q hjt

"Cheese Log: A Promotion's

Fleeting Effect.")
During the one-week pro-
motion, the cheese manufac-
turer enjoyed an immediate
$95,000 revenue increase as
customers bought more of its
brand. But the retailer saw a
$130,000 loss, because gains
from increased saies of the
promoted brand were more
than offset by defections from
regularly priced brands. Dur-
ing the dust-settling weeks,
two through six, the manufac-
turer saw a negative impact
on revenue as customers mi-
grated back to their usual brands and toward Our research shows that every promotion
competing brands that had launched their own should be viewed and evaluated as a separate
promotions. Meanwhile, retailer revenue for the marketing event. Promotions are tactical, not
cheese category gradually moved toward base- strategic, and they need to be managed that
line as the promotion effects tailed off. By week way. Only then will both retailers and manufac-
six, manufacturer and retailer revenues had turers be able to reap the benefits of promo-
returned to their prepromotion levels and re- tions while limiting the potential downside.
mained stable through week 26.
This sequence of events is common: A pro- Shuba Srinivasan Is an assistant professor at the
motion increases manufacturer revenue and de- Anderson Graduate School of Management at the
presses retailer revenue in the short term but University of California, Riverside- Koen Pauwels
has no persistent effect for either party. How- is an assistant professor at Dartmouth's Tuck
ever, different types of promotions can affect School of Business in Hanover, New Hampshire.
revenues and margins in other ways. Promo- Dominique Hanssens is the Bud Knapp Professor
tions of frequently promoted brands, for exam- of Marketing at the Anderson Graduate School of
ple, tend to have a positive short-term effect on Management at the University of California, Los
both retailers'and manufacturers'revenues but Angeles. Marnik Dekimpe is a professor at the
a negative impact on retailers' profit margins. Catholic University of Leaven, Belgium, and Eras-
Thus, the interests of manufacturers and retail- mus University in Rotterdam, the Netherlands. The
ers may well be aligned for one financial metric, full research report is available at www.msl.org/
such as revenue, but not for another, such as msi/puhlication_summary.cfm?puhlication=oi-i2O.
profit. I Reprint F0209C