For years, retailers have relied on three types of retail promotional tools to sell their products: temporary price cuts, feature advertisements, and in-store displays. Under what retail conditions are these tools most effective for increasing sales?
Manufacturers often observe enormous differences across retail accounts in response to promotional activities. However, most studies focus only on consumer response to price cuts, usually due to insufficient data, and little is known about the determinants of in-store display and feature advertising response. A new study, "The Role of Retail Competition and Account Retail Strategy as Drivers of Promotional Sensitivity," by Sanjay K. Dhar and Peter E. Rossi, professors at the University of Chicago Graduate School of Business, and Peter Boatwright of Carnegie Mellon University is the first to simultaneously examine what factors drive consumer responses to price cuts, feature advertisements, and in-store displays.
Using a comprehensive data set with all U.S. markets and all major retail grocery chains represented, Dhar, Rossi, and Boatwright investigated the role of retail competition, retail strategies, and demographics in determining consumer response to these three types of promotions.
Feature ads are leaflets or circulars from a grocery store inserted in a newspaper midweek to announce a store's special deals or sales during that specific week. Displays are usually "shelf-talkers" that draw attention to the price cut offered on a product.
The findings indicate that retail strategies and consumer characteristics greatly influence how responsive consumers will be to price cuts, features, and displays. Retail competition, while still important, turns out to have relatively less impact on consumer response.
"Retailers make long-term decisions when setting up their store, such as determining the size of the store, location, retail price positioning strategy, etc.," says Dhar. "These actions are supposed to help retailers sell more and differentiate themselves in the marketplace. At the same time, these actions will affect the extent to which consumers respond to price cuts, feature ads, and displays at their stores."
Conditions for Effective Promotions
To study the relationship between consumer responsiveness to price cuts, features, and displays and retailer and consumer characteristics, the authors used a data set that included data on the sales of ground coffee in 97 major U.S. retail accounts across 35 Nielsen Scantrak markets. A retail account is defined as a specific retailer/market combination, such as Safeway-Denver. Weekly sales data for the Folgers and Maxwell House brands was combined with demographic data and market and account characteristics using a one-step statistical method developed at Chicago GSB. The authors simultaneously measured the consumer responsiveness to price cuts, features, and displays at different retail accounts and related it to explanatory variables grouped under three categories: retail strategy, demographic variables, and retail competition. Collectively, retail strategy, demographic variables, and retail competition explain about 30 percent of the variation in consumer response.
Two major retail strategies affect consumer response: price format and store format. Retailers typically use the Everyday Low Pricing (EDLP) or Hi-Lo pricing strategy. Since prices at EDLP stores are always reduced, these retailers do not offer as many promotions. Furthermore, discounts at EDLP stores are typically lower than at other stores, due to the already heavily discounted normal prices. Hi-Lo stores normally have high regular prices, and then reduce those prices by substantial amounts, discounting more frequently than EDLP stores.
The results show that consumers who shop at stores with an EDLP pricing strategy are less sensitive to short-term price cuts than consumers at Hi-Lo stores.
Store location and breadth of product assortment also impact consumer response to promotions. Retail chains with more stores in a geographic market do not get as much benefit in sales from using feature ads as chains with fewer stores. In addition, consumers who shop at retail chains with a large number of stores in a given market are less likely to be influenced by displays, since they are already familiar with store layout.
In markets with greater retail competition, there is greater price sensitivity, making consumers more responsive to price cuts. More competition makes it easier to compare prices across national brands.
Important consumer characteristics in determining promotional response are household income, home value, and age. Higher income consumers are less likely to respond to price cuts, but more likely to use feature ads and in-store displays to save time and effort in searching for better prices. For older consumers, physical and mental constraints mean that they are more likely to use feature ads and displays to make searching for better prices easier. The study shows that older consumers are more sensitive to displays and features than price.
The authors also gauged consumer sensitivity to retail promotions by looking at private label share. Private label share refers to brands that are sold under the retailer's name and are typically priced much lower than national brands. Dhar, Rossi, and Boatwright used private label share as an indicator of price sensitivity in the study since a high private label share suggests a price sensitive customer base. According to the results, private label buyers are indeed more price sensitive than other buyers.
Getting the Right Mix
The data set's comprehensiveness over many markets allowed the authors to make broad observations about retail strategy, demographic variables, and competition. The study calls attention to the importance of account retail strategy variables in affecting consumer response to price cuts, features, and displays.
"Since consumer packaged goods manufacturers favor trade promotions over advertising and spend vast amounts to get retailers to pass the trade promotion money in the form of retail promotions, it is very important to understand how consumers will respond to retail promotions at different retail accounts," says Dhar.
From long-term strategies such as store size to short-term strategies about how much to emphasize private labels, the study demonstrates that retailers must start thinking about the consequences of these strategies in order to ensure the effectiveness of their promotional tools.
Sanjay K. Dhar is professor of marketing at the University of Chicago Graduate School of Business. Peter E. Rossi is Joseph T. Lewis Professor of Marketing and Statistics at the University of Chicago Graduate School of Business.