European Journal of Operational Research

Volume 150, Issue 3, 1 November 2003, Pages 672-687

Financial Modelling

doi:10.1016/S0377-2217(02)00526-X | How to Cite or Link Using DOI

Copyright © 2002 Elsevier B.V. All rights reserved.
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O.R. Applications

A model and solution method for multi-period sales

promotion design
, a, 1 , ,b
Suresh K. Nair and Peter Tarasewich

a
OPIM Department, School of Business, University of Connecticut, 2100 Hillside Road, U-41OPIM, Storrs, CT
06269, USA

b
College of Computer Science, Northeastern University, 360 Huntington Avenue, 161CN, Boston, MA 02115, USA

Received 13 November 2000; 

accepted 16 May 2002. ;
Available online 21 January 2003.

Abstract
This research addresses the optimal design of a series of promotions (which might offer free gifts, discounts, or
special services) periodically mailed to potential customers. A model and methodology are presented which maximize
the multiple purchases of these customers over time using opinions from both promotion designers and customers.
A Genetic Algorithm-based heuristic is developed to efficiently arrive at good promotion designs, and the
methodology is applied to a problem using real data.

Author Keywords: Genetic algorithms; Heuristics; Sales promotion design; Conjoint analysis; Multiple time periods

Article Outline

1. Introduction
2. Sales promotion design
3. A model for promotion design
3.1. Distance factors
3.2. A non-linear integer programming formulation

4. Heuristic for solving the multi-period sales promotion design problem

5. A real application
6. Results
6.1. Retail analysts
6.2. Customers
6.3. Retail analysts and customers (single promotion)
6.4. Implementing distance factors
6.5. Retail analysts and customers (series of promotions)

7. Summary and future directions

Acknowledgements
References

1. Introduction
Store or private-label credit cards can be a very profitable venture for retail corporations. Perhaps the
largest retailer credit card (CC) program in the United States is run by Sears. Estimates say that about
half of all Americans possess the store’s CC. There are some 30 million active Sears card accounts
with average balances of $1100 each ([Murphy, 2000]). There is a growing demand to not only optimize
the approaches used to increase store brand cardholder numbers, but to maintain and increase CC use
( [Murphy, 2000]; [Allard, 1995]).
The specific problem addressed in this paper is the design of a series of mailed sales promotions that
encourage customers to shop at a particular retailer and, secondly, to use that retailer’s private label
CC. Promotions in this context consist of a direct mailing to all or a select group of potential customers
who already have the store’s CC. Each mailing might offer the customers specific free gifts, discounts,
or special services when the CC is used to make a purchase during the specified promotion time
period (usually a few days). A recent survey found that a third of all consumers who carry store credit
cards do so to gain access to the benefits that such mailings offer ([Murphy, 2000]). This problem
becomes difficult because of the questions that arise when designing these promotions, such as
which potential customers to send the promotions to, whether to use multiple promotions at one
time, whether to vary the promotions over time, and how often to send the promotions.
The multi-period sales promotion design problem involves designing a series of promotions mailed
periodically to a group of potential customers. Promotion design can be looked at as a specific
instance of product design. Designing a series of products produces a product line. But the multi-period
sales promotion problem is different from a conventional product line design problem (e.g., [Kohli and

Sukumar, 1990]) in that we are not trying to maximize the single purchases of a group a people, but are
trying to maximize the multiple purchases of a group of people over time. Another way of looking at this
problem is that we are trying to increase customer lifetime value by creating dynamic, customized
incentives to encourage a customer to more frequently make purchases. Part of a promotion that
appeals to someone once may not appeal to that person again for a certain period of time and cannot
be repeated on each promotion throughout the entire series. For example, free delivery of large
appliances may be very appealing to customers, but customers will not purchase large appliances very
frequently. Another aspect of sales promotion design that needs to be maintained is their novelty,
which also requires that the promotions vary in terms of contents from one to another. However,
certain characteristics of a series of promotions may need to remain constant over a period of time,
such as long-term incentives of rebates based on yearly purchases. This problem is made even more
 difficult because of the need for taking into account retailer preferences of what they are willing to give
and customer preferences of what it would take them to go to the store and make a purchase.
Conjoint analysis (CA) procedures are widely used for collecting consumer data to be used in the
product design process ([Wittink et al]). Different methods have been developed to take conjoint data
and produce optimal or near-optimal product designs, including beam-search methods ( [Nair et al]) and
genetic algorithms (GA) ( [Balakrishnan and Jacob, 1996]). But conjoint analysis, while significantly
contributing to the product design process, has the limitation of designing a product based only on input
from the consumer. Rather than adhering only to consumer preferences, there are instances when a
better design will result from using both consumer and designer input ([Tarasewich and Nair, 2001]).
This research presents a model formulated to design a series of sales promotions over multiple time
periods while incorporating the distinct and parallel opinions of consumers and designers. The
relationship between designer and consumer viewpoints is established using a form similar to a “house
of quality” ([Hauser and Clausing, 1988]) matrix. CA is used to collect data from the two parties, which
is then used to determine an optimal or near-optimal design based on total multiparty loss. The model
also uses a set of distance factors to implement the temporal aspects of the problem.
The contributions of this paper are:
• development of a methodology for designing multi-period sales promotions, • development of a
heuristic to efficiently arrive at good designs, and • application of the methodology to a problem using
real data.
This paper is organized as follows. Section 2 presents some background on sales promotion design.
The multiperiod promotion design model is described in Section 3. Section 4 details the GA-based
heuristic used to solve the problem. The methodology is then applied in Section 5 to a real problem in
sales promotion design, and the results are presented in Section 6. The paper concludes with a
summary and areas for future research in Section 7.
2. Sales promotion design
Sales promotions, in general, are meant to stimulate stronger target market response than would

otherwise occur without the promotions. They can originate with the manufacturer and be directed at
the retailer or consumer, or be targeted at the consumer by the retailer. Manufacturer to retailer
promotions, or trade promotions, are often in the form of cash, advertising, or trade allowances.
Manufacturer to consumer promotions might consist of coupons, mail-in refunds, or free samples.
Retailer to consumer promotions often take the form of discounts, free gifts, and contests ([Lilien et
al]).
Promotion costs can be significant. Studies show expenditures on sales promotion activities totaling

72% of the average firm’s entire advertising and sales promotion budget ([Gardner and Trivedi,
1998]). Given this, there is a need to design effective promotions. This paper looks specifically at
designing retailer sales promotions that are mailed to potential customers. One way to approach this
type of promotion design is from an aesthetic standpoint, in an attempt to increase the chances of a
consumer actually reading the promotion to begin with (e.g., [Rosenfield, 1995]). But this research
looks at promotion content design, focusing on what will be offered to the customer as an incentive to
come into a store and (hopefully) make a purchase.
The promotion consists of a mailing to a potential customer who holds a store’s CC. The promotion
might offer variety of incentives such as discounts, free gifts, and special services if the customer
comes in and makes a purchases during a two to four day time period. The goals of the promotion are
to increase store sales by moving a customer’s purchase timing forward or increasing the quantity of a
product that they would normally buy, a concept known as purchase acceleration ([Blattberg and Neslin,
1990]). The result of most promotions is an increase in short term sales ( [Lilien et al]). The research
presented in this paper looks at a longer time horizon, seeking to design a series of promotions that
will continue to have the desired sales effect, even when going to the same set of customers.
Although conjoint analysis has been successfully used to design many products and services ([Wittink
et al]), there are no documented cases where it has been used to design sales promotions. The
technique was, however, recently used by [Tscheulin and Helmig, 1998] to design advertising for
hospitals. Their study looked at the effect that different attributes of full-page, color hospital
advertisements had on a subject’s perceived information value and attractiveness of the advertisement.
The design attributes used in the study were the size of the photograph used in the ad, the
characteristics of the photograph (what it showed), the relationship between the photograph and a
slogan, and the presence of descriptive text below the photograph.
CA applications usually take advantage of fractional factorial designs because of the large number of
different combinations of attributes and levels that would otherwise have to be tested. [Berger and
Magliozzi, 1993] discussed how fractional factorial designs can be used in direct mail experimental
design to reduce the number of pieces of mail sent out while still achieving reliable estimates of
response rates for various levels of different factors (e.g., the type of envelope used, the appeal of the
promotion, and the premium offered). They then demonstrated how Taguchi methods can be used to
actually design fractional factorial experiments. While their paper is a good tutorial on the benefits of
good experimental design in the context of direct mail promotions, it does not present the results of
any actual experiments that apply these techniques.
There have been many consumer promotional models developed over the years (for a good review see
[Lilien et al]), some taking into account multiple promotions or temporal aspects. A model by [Rao and
Lilien, 1972] looked at the effect of dual promotions. The first offered a game piece with each
purchase of gasoline over a certain time period. Another promotion was an unsolicited gasoline CC
mailed to potential customers at some point during the same time period (which was legal at the time of
the study). [Little, 1975] BRANDAID promotional model estimated the effect of a series of promotions
on total sales of consumer packaged goods. The model takes into account promotional intensity
(promotional size, coverage efficiency, and consumer effectiveness) at each time period, but does not
look at the details of the actual promotion design or content.
There has also been research performed in the area of coupons, but primarily on the sales effect of
single coupon promotions. For example, [Bawa and Shoemaker, 1987] looked at modeling the effect
that a mailed coupon for a particular product had on purchasing that product. They used a cost-benefit
model to predict the probability of coupon use as a function of prior purchases of the promoted and
competing brands, consumer handling costs, and coupon value.
While previous research has shed light on effective use of promotions, there does not seem to be
anything that looks specifically at the problem of designing the content of a series of single, mailed,
multi-incentive promotions. This research seeks to take a step in that direction by presenting a
 methodology for promotion design that integrates consumer and retailer preferences. Promotions
are designed over a period of time, and limitations are placed on the frequency at which certain
incentives in each promotion can be offered. The model that sits at the core of this methodology is
presented next.
3. A model for promotion design
A model is needed that designs a series of promotions that minimizes the total multiparty loss.
Multiparty in this case refers to both customers and retail analysts (who work for the retailer). Loss is
the distance each party is from their preferred choice, and is loosely based on the concept of the
Taguchi loss function (e.g., [Taguchi and Clausing, 1990]). Even though a single promotion can be
designed with a minimum multiparty loss, it may not be optimal to send that same promotion out each
time, because the customer may not respond to the same promotion the same way each time. The
model assumes a fixed number of promotions and a fixed time duration between each promotion.
However, to ensure that certain levels of each characteristic do not occur in successive promotions, a
minimum duration time between level occurrences is introduced. This is discussed further in Section
3.1.
This model contains retail analyst (designer) part worths matrices D(k) for each retail analyst
characteristic k=1,…,K. Each characteristic k has jk=1,…,Jk levels. There are i=1,…,N1 analysts, working
for the retailer, that are polled for their preferences. Entries in matrix, dijk, are the utility of analyst i for
level j of characteristic k. There is also an analyst constant utility matrix D(0), with entries di0 for each
analyst i. The values for each of these matrices are determined by analyzing the preference data
collected from each analyst, using a statistical software package that handles conjoint data analysis.
For each promotion design, we solve over t=1,…,T equally spaced time periods.
A promotion design preferred by retail analysts, PDt, can be chosen at each time period t by specifying
a level jkt* for each retail analyst characteristic k. A total utility for each analyst i at time period t, uit, can
be derived by summing over each attribute at the specified level and adding this to the constant value:

uit=di0+∑k=1Kdijkt*k

The model also contains customer part worths matrices for each customer attribute

. Each customer attribute has levels. There are î=1,…,N2 customers. Entries in the

matrix, , are the utility of customer î for level of attribute . There is also a matrix C(0) of customer
utility constants, with entries cî0 for each customer î.
There will be an equivalent customer promotion design PC|Dt (the customer design C given the retail
analyst design D at time t) which can be determined to be the closest to the retail analyst preferred
design. This is derived using a predefined relationship matrix M, similar to a “house of quality” matrix,
which is used to relate the set of analyst characteristics and levels to the set of customer attributes and
levels. This is necessary because analysts use a different set of definitions and levels to specify a

promotion design than customers. gives a weighting value to the relationship between level j of

retail analyst characteristic k to level of customer attribute . A higher value represents a stronger
relationship. The weights are summed for each level of each customer attribute to determine the
equivalent customer promotion design PC|Dt at a level for a given retail analyst promotion design
PDt. This methodology assumes that an M-matrix was created when the analyst characteristics and
customer attributes were decided, and does not change during the process of determining a promotion
design. It simply converts a design as seen by one group of people into an equivalent design as seen

by the other group. See [Tarasewich and Nair, 2001] for more details concerning the relationship matrix
concept and creation of the matrix.
A total utility for each customer î at time period t, vît, can be derived for the equivalent promotion
design PC|Dt:

Average utilities are then defined for each promotion design at time t:

For all possible PDt there is a maximum , , and for all

PC|Dt there is a maximum , .

The objective is to minimize the sum of zt, the sum of the distances of the utility values of the chosen
product design from the maximum possible utility values for both customers and analysts, across all
time periods T, where

with α1 and α2 used to further define the loss functions. α1 and

α2 are normally set equal to 2, zt 0.
Actually setting α1=α2=2 results in the following objective function:

Using the fact that minimizing x is equivalent to maximizing 1−x, along with further simplification, results
in the following alternative function that can be used with the objective of maximizing zt across all time
periods T:

With this function, the total “loss” value across T time periods approaches 2T rather than zero, which
makes comparisons between results more realistic and understandable.
3.1. Distance factors
The temporal aspect of the multiperiod promotion design problem makes it both unique and difficult to
solve. A single promotion can be designed to be as appealing as possible to a group of potential
customers. But when sending out a series of promotions, the problem becomes more difficult in that
the promotions must remain appealing over an extended period of time. To further complicate the
issue, it may be impractical or undesirable from the designer viewpoint to offer certain incentives (e.g.,
free products or steep discounts) too often, no matter how much they are preferred by the customers.
As an example, assume that one promotion is sent out each month. Consider offering an extended
service warranty as one incentive for a customer to come into the store and make a purchase. This
would be appealing to customers shopping for electronic devices or home appliances, especially those
with a high purchase price. But these types of items may not be something that the consumer
purchases frequently. So an extended service warranty, if highly preferred by customers, would appear
in a single optimal promotion design. But it would probably not be optimal to include an extended
service warranty every month.
There are other reasons for varying the content of sales promotions. Those customers who were not
attracted enough to a current promotion may be attracted to another one. This situation favors
sending out different promotions, but ones that were rated nearly as highly as previous ones. Some
customers may have been attracted to the current promotion, but did not respond to it for various
reasons (e.g., they were out of town when it occurred). This favors sending out the same promotion
again at a later time.
The customer may ultimately desire to have the highest level of all benefits available for each
promotion in a series. For example, a customer’s preference for a 20% discount off a product will most
likely be higher than a 10% discount. But in the long run, offering a 20% discount each time may be
unprofitable for the company. The customer may also respond better to variety in the promotion
offerings. Maintaining novelty by varying the contents of one promotion to another may work better
than a series of duplicate promotions that the customer may choose to ignore after a while.
On the other hand, certain characteristics in a series of promotions may need to remain constant over
time. Suppose that the long-term incentive of receiving cash rebates based on yearly purchase totals is
preferred by customers and retail analysts. It would probably not make sense for this to change each
month, since companies would want customers to build purchases towards that specific rebate program
over a long period of time, and the overhead of only one long-term promotion would be preferable.
Customers might also become annoyed if long-term promotions seem to change after they have
started working toward them. In this case, the same long-term incentive should be used with each
promotion of the entire series.
Our model assumes that a fixed number of promotions and a fixed time duration between each
promotion are given. It also restricts how often a level of a particular characteristic can appear in a
series of promotions through the use of distance factors, yjk, which ensure minimum time durations
between occurrences of a level. For example, y21=1 means that if level 2 of characteristic 1 is used in
time period t, it cannot be used again until time period t+2. yjk can vary from 0 to T−1.
Looking at the extended service warranty example again, assume that a series of four promotions
(T=4) are being designed. We can create a characteristic that has two levels, the first level signifying
that the promotion design offers an extended warranty, the second signifying that it does not. Letting
 this characteristic be the first one for the promotion design, setting y11=3 will ensure that an extended
service warranty will be offered on no more than one promotion out of the four. But with or without this
constraint in place, whether or not the extended warranty actually appears in a promotion design in
the series will depend on the preferences of the customers and analysts that are polled.

3.2. A non-linear integer programming formulation

The following is a non-linear integer programming formulation of the multisource data multi-period
sales promotion design problem. Let there be a set of Ω={1,2,…,K} of K retail analyst characteristics;
each characteristic k Ω has JK levels from the set Φ={1,2,…,JK}. Let there be N1 analysts from the set

Θ={1,2,…,N1}. There is also a set of of customer attributes; each attribute

has levels from the set . Let there be N2 customers from the set Θ
′
={1,2,…,N2}. is a weighting value for the relationship between level j of analyst characteristic k

and level of customer attribute . In addition, let T be the time horizon for the problem, thus there are
T equally spaced time periods from the set T={1,2,…,T}. yjk is a distance factor for each retail analyst
characteristic and level. Variable xjkt equals 1 if level j is chosen for characteristic k for a particular

analyst promotion design for time period t, and 0 otherwise. Variable equals 1 if level is chosen

for attribute for a particular customer promotion design for time period t, and 0 otherwise.
Maximize

(1)
∑t=1Tztsubject to

(2)
uit=di0+∑k∑jdijkxjkt, i Θ, t T

(2)

(3)

(3)

(4)
 (5)
∑jxjkt=1, k Ω, t T

(5)

(6)
∑tt+yjk T
xjkt 1, j Φ, k Ω, t T

(7)

Here the objective function (1) maximizes the equivalent of the negative of the loss to the customers
and retail analysts (using the alternative zt described in Section 3) over T time periods over all possible
promotion designs under consideration. ((2a) and (2b)) calculate the total utility value for an analyst or
customer promotion design in time period t. Constraints ((3a) and (3b)) calculate the average analyst

and customer utilities for a promotion design defined by xjkt and . Constraint (4) is the total
multiparty “loss” for a given promotion design (using the alternative function) for time period t. Eqs.
((5a) and (5b)) ensure that only one level is picked from each characteristic or attribute in the profile of
each analyst promotion and the equivalent customer promotion for time period t. Eq. (6) keeps a
minimum duration between occurrences of a specific analyst characteristic and level. Eq. (7) relates the
set of analyst characteristics and levels to the set of customer attributes and levels for time period t.
This constraint is quadratic.
4. Heuristic for solving the multi-period sales promotion design problem
Based on biology, GA use methods such as reproduction, crossover, and mutation to search quickly for
solutions to complex problems. Early work in this field can be traced back to [Holland, 1975]. GA start
with a set (usually random) of possible problem solutions, each represented by a string of bits or
characters. A fixed number of solutions that are the most “fit,” i.e., the best current solutions to a
problem, are carried over to the next generation and chosen to reproduce. In other words, the best
current solutions are saved, and are used to generate new solutions. These strings (best current
solutions) can be altered to produce children (new solutions) using genetic operators. One of these
operators is crossover, in which a randomly chosen sequence of bits is exchanged between two strings
to produce two new strings. Another is mutation, which randomly alters bits within a single string to
produce a new string. The new population is evaluated, a new reproducing population is chosen, and
the process of crossovers and mutations repeats for a predetermined number of iterations or until an
acceptable evaluation level is reached.
The GA approach to problem solving has some advantages over other optimization and search
procedures ([Goldberg, 1989]). GA searching is done from a population of points, rather than a single
point (as with branch-and-bound and other techniques), which increases exploratory capability. Payoff
 (objective function) information is used directly for evaluation, rather than derivatives used by gradient
search techniques. GA evaluate specified candidate solutions completely, versus building profiles one
attribute at a time. GA also work with a direct coding of parameters, rather than the parameters
themselves. Optimization problems, such as the product design problem, that are characterized as
discontinuous, high-dimensional, and multi-modal should be especially suited for GA as opposed to
gradient or random search techniques ( [Balakrishnan and Jacob, 1996]).
Using a GA approach, the multi-period sales promotion design problem takes into account data from
both parties with each iteration, and minimizes the total loss of both parties over a fixed number of
promotions while incorporating distance constraints between the levels of each analyst characteristic.
Heuristics are justified because the product design problem has been shown to be very difficult (NP-
hard) to solve to optimality in a reasonable amount of time ([Kohli and Krishnamurti, 1989]).
1. Define
• A set of current population strings W of size |W|, each string representing a series of T product designs
from the retail analyst’s perspective. Initially, W consists of randomly generated strings. Each design must
conform to a set of distance constraints, Y.

• A set of equivalent consumer strings of size |W|, generated using the relationship matrix M.
• A working population WW of size |W|.
• MUT is the number of mutations performed on the reproducing population per iteration.
• r1, r2, and r3 are the number of candidate strings to be selected for reproduction based on analyst,
customer, and combined analyst and customer preferences, respectively. r1+r2+r3 must be less than |W|
−MUT.
• MAXIT is the maximum number of iterations (new populations generated) before the heuristic terminates,
if the boundary criterion is not met sooner.
• CHANGE is the amount that the average of the top 3 evaluation criterion zLS (the total loss) must improve
over four iterations, otherwise the heuristic will stop.
2. For the retail analysts as a whole, each string of the current population W is evaluated to determine
its average utility to the retail analysts. 3. The equivalent customer designs for the current population
are determined using the predefined relationship matrix M. For the customers as a whole, each string of
the current population is evaluated to determine its average utility to the customers. 4. The r1 top
candidates (from W) are determined based on total retail analyst utility. Next, the r2 top candidates (from
) are determined based on the total customer utility. Finally, the top r3 candidates are determined
based on the smallest loss to society, zLS. The top r1 strings, and the analyst equivalents of the top r2
and r3 strings, become part of the working population WW. Duplication is eliminated in WW by removing
strings from further consideration once they become part of WW. 5. (|W|−(r1+r2+r3)−MUT) random
crossovers are performed. For each of T product designs, the levels from a randomly chosen
characteristic and each characteristic to the end of the string are switched between two randomly
chosen strings from WW. As an example, take the following two strings, each consisting of T=3 product
designs. Each product design consists of three characteristics, and each characteristic has three levels.
The numbers given are the levels of each characteristic:
If characteristic 2 is chosen as the crossover point, the two resulting strings are:

This is a modified single-point crossover, which keeps the resulting strings from violating the distance
constraints Y. The two strings are chosen at random without replacement from WW, and remain part of WW.
The two new strings (resulting from the crossover) become part of WW when all the crossovers have been
generated.
6. MUT mutations are performed on the population of WW, which now includes those strings produced
by the crossovers. A string is chosen at random, and a characteristic in the string is picked at random.
The level of the characteristic in each of the T product designs is randomly changed, producing a new
string, while adhering to the distance constraints Y. The old string remains part of WW, and the new
string is added to WW after all the mutations have been generated. 7. Working population WW replaces
the current population W, and WW is set to null. 8. Each set of strings (w and its equivalent ) of the
current population is evaluated to determine the total multiparty loss (zLS). The average of the top three

zLS values from W and , , is determined. If does not improve by more than CHANGE over four
iterations, the heuristic stops. Else, it continues with Step 4 above. This guarantees at least four
iterations of the heuristic.
See Fig. 1 for the pseudocode for the multi-period sales promotion design heuristic. Next presented is
a real application of the model and heuristic.

Full-size image (10K)

Fig. 1. Pseudocode for multi-period promotion design heuristic.

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5. A real application
The model and heuristic for multi-period sales promotion design will now be applied to a real problem.
This study was done with the help of a large financial services firm that provides private label credit
cards for different retailers throughout the United States and handles their mail promotions. Presented
here are the results of an initial study for a single retailer (a large department store chain). Attention is
restricted to mailed promotions to store card holders.
The promotion is modeled as consisting of a number of characteristics that are incentives for a
cardholder to use that store’s specific credit card to make a purchase. A set of retail analyst
characteristics was designed based on (1) a search on current literature related to credit card
promotions, (2) current and past CC promotions the retailer has used, (3) promotions that other
retailers have used, (4) input from the financial services firm, and (5) input from the retailer. A set of
nine retail analyst characteristics, each with three or four levels, was defined as follows (with levels in
parentheses):
Free gift retail value (none, $10, $20, $30) Form of immediate benefit (cash back, gift certificate,
purchase price discount) Level of immediate benefit (0%, 5%, 10%, 15% of single purchase) No
payment/0% interest option (none, 90 days, 180 days, 365 days) Extended service warranties (none,
extended, lifetime) Free delivery (none, selected items, all items) Free installation or setup (none,
selected items, all items) Form of yearly benefit (cash back, gift certificate, points towards merchandise,
points towards discount) Level of yearly benefit (0%, 2%, 5%, 7% of yearly purchases)
Each card represents a promotion that a CC holder would receive in the mail. Characteristic D1 is the
value of a gift a person would receive when making a CC purchase. None means no gift given.
Characteristic D2 is what type of immediate benefit is given to the customer when making a CC
purchase on a single visit. D2b is the value of that benefit (0% is no benefit). Characteristic D3 is
whether there is a no payment option on purchases. Characteristic D4 is whether any purchase
receives a modified warranty. Characteristic D5 is whether purchases qualify for free delivery.
Characteristic D6 is whether they qualify for free set-up or installation. Characteristic D7 represents a
yearly benefit (if any) available to the cardholder. D7b is the level of that benefit.
CA procedures were used for data collection. A set of 32 cards was generated, each card containing
one level from each of the analyst characteristics and representing a possible promotion design. The
set of cards forms a fractional factorial design (which is also orthogonal) generated using SPSS-PC. An
assumption is made that there is no interaction between attributes (i.e., a main-effects model is used).
This assumption is made quite often in conjoint analysis and has been found to work well (see, for
example, [Curry, 1997]; [Green and Srinivasan, 1978]). Three analysts in charge of designing
promotions at the financial services firm participated in this phase of the study. A set of cards was
sorted by each analyst from most preferred to least preferred. From the final ordering of the cards, a
part worths (component utility) is derived for each level of each of the analyst characteristics.
A set of customer attributes was also designed. Customers may look at attributes that are quite different
from retail analyst characteristics when evaluating a promotion, because they may have different
concerns than the analysts, and because they may look at things from a different perspective or from a
higher (less detailed) level. The set of customer attributes (and levels) was defined as follows:

Benefits apply to any purchase(s) made during a specific time period using the store’s CC, except long-
term benefits which apply to all purchases made during the year. CA procedures were used to collect
customer data. A set of sixteen cards (with one level from each of the attributes chosen per card) was
administered to thirty-three shoppers who had the retailer’s CC (or acquired one that day). While a
larger number of subjects would have been desirable, this sample size is adequate for the purposes of
the experiment. The study was performed on a Saturday afternoon at a single location of the retailer.
The cards were sorted by the subjects from most preferred to least preferred. The task took
approximately 10 minutes to complete. The subjects were compensated with a free gift (approximate
 $10 retail value) for their participation. A part worths value was then derived for each level of each of
the customer attributes from the final ordering of the cards.
The customer attributes were designed in such a way that they correspond to at least one of the retail
analyst characteristics. A relationship matrix (Fig. 2) was developed to show the correspondence
between the characteristics and attributes. Each retail analyst characteristic/level combination was
weighted as to how well it corresponds to a given customer attribute/level choice. From this relationship
matrix, a given promotion design using analyst characteristics and levels can be mapped to an
equivalent design using customer attributes and levels. Presented next are the results of the
experiment.

Full-size image (20K)

Fig. 2. Relationship matrix.

View Within Article

6. Results
The results of the two conjoint data collections were analyzed using the SPSS-PC software package
with the Categories option. Two distinct sets data were collected, one from the customers and one from
the retail analysts. Each of these two data sets could be used by themselves to design a promotion,
one that is optimal for the customer (C-optimal) and one that is optimal for the retail analyst (D-optimal).
However, the C-optimal design may not be highly preferred by the retail analysts, and the D-optimal
design may not be the customer’s favorite design.
But the two data sets are related to each other. They can be used to produce a more balanced
promotion design that is somehow “better,” or at least more significant in some respect, than can be
obtained by only using one set of data. The best such promotion design (CD-optimal) is the optimal
from both the customer and the retail analyst perspectives. A series of more balanced promotion
designs can then be developed that not only satisfy customer and retail analyst preferences, but also
keep certain promotion characteristics from repeating too often within the series.

6.1. Retail analysts

Based on the data collected, as an equally weighted group, the analysts prefer a promotion design
with the following characteristic levels and a total utility value of 29.62:
Free gift retail value ($10) Form of immediate benefit (gift certificate) Level of immediate benefit (15% of
single purchase) No payment/0% interest option (180 days) Extended service warranties (extended)
Free delivery (all items) Free installation or setup (selected items) Form of yearly benefit (cash back)
Level of yearly benefit (5% of yearly purchases)

6.2. Customers
 Twenty-seven usable responses were obtained from the 33 subjects polled. Customers prefer, as an
equally weighted group, a promotion design with the following attribute levels and a total utility value
of 12.963:

6.3. Retail analysts and customers (single promotion)

The customer and retail analyst data can be used to minimize the multiparty loss, that is, to satisfy the
needs and wants of the customers and retail analysts as best as possible, given that each one on their
own would prefer a particular promotion design. This can be accomplished by finding a compromise
promotion design (CD-optimal) that minimizes the total percentage loss, in terms of maximum
achievable utility value, from both the C-optimal and D-optimal product designs.
The D-optimal (retail analyst) promotion design (described in Section 6.1) has a total utility value of
29.62. Using the initial weighted relationships between the retail analyst characteristics and customer
attributes (the matrix in Fig. 2), this D-optimal design corresponds to a customer promotion design
with the following attributes and levels, and a total utility of 12.0556.

Because both the customers and retail analysts can not achieve their respective optimal promotion
designs, there is a resulting multiparty loss. This is calculated as

[1−(29.62/29.62)]2+[1−(12.0556/12.963)]2=0+0.005=0.005which is the sum of the total loss to both

groups, in terms of the utility of the more balanced design as a percentage of the maximum achievable
utility value. If both groups achieve their optimal designs, the total loss is zero. The terms are squared
to be consistent with Taguchi’s concept of a quadratic loss function.
Is there a more balanced design with a lower multiparty loss? In this case there is. Through complete
enumeration it is found that the customers will get the optimal promotion design already described.
The retail analysts will get the following promotion design:
Free gift retail value ($10) Form of immediate benefit (gift certificate) Level of immediate benefit (15% of
single purchase) No payment/0% interest option (180 days) Extended service warranties (extended)
Free delivery (none) Free installation or setup (selected items) Form of yearly benefit (points towards
discount) Level of yearly benefit (5% of yearly purchases)
This is similar to the promotion previously described, except that the long-term promotion has the
customer receive points towards purchase discounts instead of a yearly cash-back bonus. This design
also does not include free delivery of any merchandise. Note here that customers are getting a yearly
benefit of points towards a purchase discount rather than points towards merchandise. The customers
were never asked to consider the option of points towards merchandise during their part of the
experiment. The final choice is therefore a more balanced design based on analyst and customer
preferences, using the relationship matrix. The customers are also getting more from the promotion
design than they might expect, such as a free gift, a higher gift certificate value, and extended service
warranties. And even though the analysts also prefer free delivery of all merchandise, the relationship
matrix is currently designed in such a way that there are forced compromises between free delivery,
free installation/setups, and extended warranties. The multiparty loss for this solution is:
 [1−(29.34/29.62)]2+[1−(12.963/12.963)]2=0.00009+0=0.00009

6.4. Implementing distance factors

In the previous section, a single promotion was designed that is preferred by both customers and
retail analysts. Realistically, however, it may not be desirable to mail this same promotion to potential
customers each time. The larger problem is to design a series of promotions that the customers and
analysts prefer the most.
While selection of the factors is probably best done by the promotion designers or retail analysts
themselves, the process might be supported by first conducting a preanalysis of the customer and
analyst preference data. If a number of promotion designs were determined initially without
considering the distance factors, the designs could be used with a weighting scheme to find the
“attractiveness” of the different attribute levels. Those levels that are most preferred would receive
smaller distance factors, so that they would appear more often in hopes of attracting more customers.
These initial distance factors would be used as a starting point for the actual multiperiod analysis, and
could be overridden due to other considerations such as cost and consistency.
Distance factors (Table 1) were assigned to each characteristic level based on designing a series of
four equally spaced promotions. A value of 0 means that the level can (but does not have to) occur
every time period. A value of 1 allows the level to be used only every two time periods, and so on. A *
signifies a level that, if used, will not change throughout the series of promotions.

Table 1. Distance Factors

Full-size table (1K)

View Within Article

If the same level of characteristic 1 (free gift) is chosen more than once in the series of promotions, it
does not mean that the gift will be the same, but that only the retail value of the gift will be the same.
The distance factors for characteristic 5 (free delivery) allow a situation where free delivery could be
 offered on selected items (e.g., large appliances) every two months, and delivery on all purchases
every three months.
6.5. Retail analysts and customers (series of promotions)
The bi-directional heuristic was used to find good solutions using the distance factors described above.
A series of four promotions is generated, representing four time periods which can be repeated if
desired. If all possible combinations of four promotion designs were considered, one would have to
look at approximately 4.7×1019 possibilities. The heuristic finds good solutions to this very large problem
in a matter of minutes. It was run with various working matrix sizes, mutation rates, and values for r1, r2
and r3. Some of these results are shown in Table 2. The values given are the total loss to society for a
series of four promotions, but using the alternate maximization function described earlier. The best
series of these promotions is shown in Table 3. Note that the yearly benefit stays constant throughout
the series of promotions because it needs to be offered consistently throughout the year.

Table 2. Promotion design results using heuristic

Full-size table (<1K)

Total multiparty loss over four periods. Retail designers=3, customers=27, MAXIT=25,
CHANGE=0.5% W=200, r1=r2=r3=20.

View Within Article

Table 3. Best series of four promotions

Full-size table (<1K)

View Within Article

Since the heuristic used the alternate objective function, the highest achievable value for the series of
four promotions is 2×T=2×4=8. The maximum achievable (upper bound) for this problem is actually
4×1.9999=7.9996. This would be achieved by using the single optimal promotion four times in a row.
But this is not possible, because of the distance constraints. Conflicts arise when trying to use the same
levels of characteristics D2b, D4, and D6 more than once. The above solution (the one corresponding
 to the largest value from Table 2) is 7.9752/7.9996 or 99.7% (in terms of minimizing loss) of the best
theoretical design that can be achieved.
The heuristic appears to work well. Given the size of the problem, complete enumeration for
comparison purposes is not a valid option. However, 100,000 random promotion designs that meet
the distance constraints were generated. Of these values, the highest found was only 7.878. The
heuristic, on the other hand, found 39 solutions greater than 7.878 in only 40 attempts.

7. Summary and future directions

A model for multi-period promotion design has been developed that takes into account the
preferences of both customers and retail analysts, as well as the time element involved in sending out
such promotions. It was shown how this model could be formulated as an integer program. Since this
problem is very large, a GA-based heuristic was developed that arrives at good solutions in a short
period of time. The model and heuristic were then applied to a retail promotion design problem using
real data.
While this research makes many significant contributions as it stands, there are also areas for future
work. In terms of the sales promotion application, the sample sizes could be expanded, possibly
adding another group of people (e.g., management, manufacturers, distributors, community members)
to the preferences considered in the final design. Another possibility is expanding the number of
attributes and levels considered, and studying what effect changes in the relationship matrix have on
results. Also, costs are not explicitly considered in this study, except for the stated value of merchandise
for each level of the “free gift” designer attribute. When ranking the different promotions, analysts and
customers most likely take into account the cost or value of each promotion. But promotion cost
might be added as a distinct characteristic for the retail analysts.
Ways of determining the distance factors used in the methodology need to be studied further. Thought
should also be given to other ways of implementing the concept of distance factors. If promotion
response history is available, the distance factors might be updated before a new set of promotions is
sent out each time period. With data about specific customers and their purchase patterns, promotions
could be targeted directly to the preferences of the individual instead of to the overall preferences of

the group. The authors will investigate the determination and implementation of distance factors further
in future research.
The multiperiod model might be expanded to other applications that have to consider a time element
(e.g., magazines). The methodology presented in this paper might also be applied to promotions on
the Web. A long-term study also needs to be performed to validate the model through actual results
from one or more promotions. Another way of designing a sequence of promotions may be by
recognizing that preference matrices can change over time. If experiments can be designed in such a
way to capture this, then sequential promotions can be designed without the need for distance factors.
One way to go about this might be to find preferences for those people who recently received their
optimal promotion, and to design new promotions based on this changing data.

Acknowledgements
The authors would like to thank Srinivasan Ratneshwar for his feedback on this research, and Geoffrey
Lantos for his comments on an earlier version of this paper.
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Corresponding author. Tel.: +1-617-373-2078; fax: +1-617-373-5121

 1
Tel.: +1-860-486-3641; fax: +1-860-486-4839.

European Journal of Operational Research

Volume 150, Issue 3, 1 November 2003, Pages 672-687
Financial Modelling

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