Sales Promotion in Conjoint Analysis
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SALES PROMOTION IN CONJOINT ANALYSIS Eline van der Gaast, SKIM Marco Hoogerbrugge, SKIM RotterdamRotterdam | Geneva | Geneva | London | London | New | New York York 1 / 13 www.skiwww.skimgroup.mgroup.comcom SUMMARY This paper is about sales promotion as an attribute in conjoint studies. Promotions may involve a direct financial gain, and/or indirect benefits. A promotion generates extra attention for the product and the feeling of saving money. Typically, if one does a promotion that has the same financial savings to respondents as lowering the normal price, the effect of the promotion is much higher than simply reducing the price, due to the ‘attention’ effect. It is important to be aware that promotions provide a short-term benefit followed by a post-promotion dip. Even though promotions are difficult to study, conjoint analysis is effective in helping understand which promotion is more effective and which consumers you will attract with the promotion. Future research should aim to incorporate time elements into conjoint studies, to simulate more accurately purchase cycles and long-term effects of promotions. INTRODUCTION In times of economic crisis market research is a field that is actually blooming (Andrews, 2008). Especially during times of crisis companies have to make deliberate decisions on how to invest their marketing budget to optimize profits. In the fast moving consumer goods industry, competition is high and promotions are often used as a tool to increase sales. A promotional scheme that will provide the most optimal outcome will give a manufacturer a competitive advantage. Next to boosting short-term sales there are several other motives for using promotions in the consumer goods industry; eliciting trial among non-users or for new product introductions; dealing in markets with increased price sensitivity; and as an alternative for advertising. In a recent meta-analysis (SKIM, 2009), some of the main promotions found in conjoint studies have been classified as shown in Table 1. Table 1 – Classification of promotion types Direct Gain Example Indirect Gain Example Price discount in € €5 off Free gift Free spoon Price discount in % 20% off Coupon Gasoline card €40 Now for Now €1 Feature Washable From - To From €5.07 to € 4.06 Claims Best in test Larger pack +6 pads Additional pack 3 for price of 2 Multiple unit price Now 2 for €2 First of all a distinction is made between a direct and an indirect monetary gain from the promotion, resulting in two different groups of promotions. Direct gain in this case means that the discount is focused on the product itself and the discount comes in either a price reduction or an increase in volume. A gift or a new product feature would be examples of an indirect monetary gain. Within these Rotterdam | Geneva | London | New York 2 / 13 www.skimgroup.com two groups additional subcategories can be identified. This paper however will focus only on promotions with a direct financial gain. The effects of a promotion are in general threefold. First of all, promotions are very effective in drawing attention. In addition to this promotions give the consumer the feeling of having saved money as well as the rational of a lower net price. These last two effects are direct benefits for the consumer. When looking at the effects in more detail it is often observed that drawing attention and giving the consumer the feeling of having saved money is in reality more important than the actual net price. This can be illustrated by an example of a previous study which included promotions at SKIM [SOURCE]. In this particular study there is a base case share of 4.7% at a price of 24.95. First a regular shelf price reduction is applied lowering the price to 19.95. This leads to a share of 5.8%. However, when a promotion (“from 24.95 to 19.95”) is used a share of 11.1% is obtained. So basically the rational price effect is only 1.1% (5-8%-4.7%), whereas the effect of drawing attention plus giving the feeling of have saved money is 5.3% (11.1% - 5.8%). This result was also confirmed by the meta-analysis (SKIM, 2009). It must be noted that this effect is not consistently found for all promotion types. It was observed that price promotions always lead to more share, whereas a promotion of i.e. a feature sometimes leads to more share, depending on whether or not the feature is attractive to the consumer. Another key finding of the meta-analysis on promotions is that the way you express a promotion can lead to different results, even though the actual net price might be the same for the two promotions. This means that one cannot simply replace one promotion by another and expect the effect on share to be the same. LIMITATIONS OF PROMOTIONS IN CONJOINT STUDIES When using promotions in a conjoint study it is important to keep the limitations in mind. Knowing what can and cannot be determined from including promotions is essential. Only looking at the results as just described in the introduction could lead to over-estimating the effect of a promotion. One of the main reasons for this is that when using current approaches one can only see the direct effect of a promotion. The next section will illustrate why it is so important to determine the full effect of promotion. Post-promotion dip In general, most promotions result in an increase in short term sales (Lilien et al., 1992). Using Conjoint Analysis (CA) the direct effect of a promotion can be estimated. However, next to the direct effect of a promotion there is also a dynamic effect. Many researchers have investigated the dynamic effects of promotions. In general it is observed that a promotion period with increased sales is followed by a post- promotion dip. For example, Neslin and Stone (1996) pointed out that stockpiling should be observable in sales data through post promotion dips however it is unclear why these dips are not consistently found in the data. This resulted in a debate in literature as to why the post-promotion dip was sometimes not observed in store data. In a study by Van Heerde et al. (2000) this so-called paradox of the post- promotion dip was examined and they concluded that the post-promotion dip paradox does not necessarily have to exist but that it can be noticed in careful specified time-series models. This finding Rotterdam | Geneva | London | New York 3 / 13 www.skimgroup.com was also confirmed by other studies (Pauwels et al., 2002; Van Heerde et al., 2004). To be able to determine the best strategy with respect to promotions for a specific product category as well as to understand the post-promotional dip one must comprehend the different promotional responses with respect to changes in consumer behaviour. Multiple researchers (e.g. Chan et al., 2008; Bell et al., 1999; Gupta, 1988) have decomposed the components of short term effects of price promotions into brand switching, purchase acceleration, stockpiling, and increased consumption. These effects can also be grouped into primary and secondary demand expansion (Bell et al., 2002). Secondary demand expansion refers to an increase in sales due to purchases made by consumers that were not buying the brand before (brand switchers). Van Heerde et al. (2004) refer to this secondary demand as cross-brand effects. Primary demand expansion on the other hand relates to additional purchases made by non- switching consumers engaging in purchase acceleration, stockpiling and increased consumption (Van Heerde and Neslin, 2008). This group can be further classified into primary demand borrowed from future time periods (purchase acceleration and stockpiling) and remaining primary demand (increased consumption). The following section will describe the effects of a promotion on consumer behaviour. Brand switching One of the first researchers to decompose promotional responses was Gupta (1988). In his study he found that the main response to a promotion was brand switching, accounting for 84% of the change in volume sold. Brand switching in this context refers to the situation that a consumer buys the promoted brand whereas he/she would usually buy a different brand. Gupta’s interpretation was that if a brand gains 100 units during a promotion and 74% of the sales elasticity is attributed to brand switching; other brands in the category are estimated to lose 74 units. Other studies have found similar results (i.e. Chiang, 1991; Bell et al., 1999). However, a more recent study by van Van Heerde et al. (2003) re- evaluated the dataset of Gupta (1988) with a different measure. They transformed the elasticity into unit sales and found that only 33% of the volume change during a promotion was due to brand switching. Chan et al. (2008) also confirmed that brand switching is not the main force for increased sales. Nonetheless, brand switching is a major driver behind the sales increase during a promotion, meaning that under promotion users of other brands start buying the promoted brand. Assuming that brand switchers return to their main brand as soon as the promotion finishes, brand switching could not cause the post-promotion dip, as sales would simply return to their average level. In general, brand switching is the only effect that is observed when using promotions in CA. Purchase Acceleration Under purchase acceleration consumers decide to make their purchase before they are actually out of stock and hence this affects their regular purchase rate cycle. A promotion can accelerate a purchase (Blattberg et al., 1981) and this effect is closely related to the suggestion of a time-limit or expiration date of a promotion.