Assignment on Promotion Models

Submitted By:
Name : Rohit sankpal Class : Marketing A Roll no: 010156

Submitted to
Jyoti mam

Promotional models
A number of promotional models have been developed and propsed in the marketing literature. They generally fall into three categories : (1) Theoretical models without empirical support (2) Regression type models without theoretical justification (3) Empirically supported models derived from or related to some behavioral hypotheses

Models in the first category are often untested and will be briefly reviewed later. The second types of models, while widely used by many firms, do not provide much general insight.

Modeling approach:
Because of the lack of knowledge about customer heterogeneity, the authors chose an aggregate modeling approach. In the given franchised-retailed setting they hypothesized that incremental gains in sales from a promotion depend on three factors: 1. Promotion potential : The potential of a promotion is related to the fraction of individuals not currently participating in a promotion. If the promoting brands has a joint market share of m, then (1-m) can be switched and potential P, the likelihood of a randomly chosen customer being in the target market, is an increasing funciton of (1m). 2. Promotion reach, R: The more outlets the promoting brand (or brands) has, the easier a willing individual will find it to participate. Thus if m is defined as above, then reach R, the likelihood that a

randomly chosen customer can reach the promoting outlet, is an increasing function of m.

3. Promotion strength, S : The more interesting the promotion, the more likely an individual will be to take advantage of it. The strength S of the promotion is modeled as K(x, t), where x represents the characterisitics of the promotion and t is time. The analyst might hypothesize that K is S-shaped in x and decreasing in t.

Other promotional models

Recent modeling in the promotional area has proceeded along two main dimensions: 1. Theoretical models 2. Operational models

We review some key developments in the former area here and the following section addressed development in the latter area. 1. Theoretical models: A number of theoretical models have tried to explain the justification for and the effects of promotion. Following Blattberg and Neslin (1990, ch.4), we discuss these models along the dimensions of demand uncertainity, inventory cost shifting, differential information, price brand loyalty, and competitive analysis. Demand uncertainity: Using a fairly simple model, Lazear (1986)tries to explain why retailers often price high at the beginning of a season and reduce price at the end. If the seller does not know the buyers valuation for the product, a high initial price should prove acceptable for those buyers with high evaluation, while the lower price captures customers with lower valuations later. his conclusions from his model are

a. Flexible pricing increase profitability b. The smaller the number of potential buyers, the lower the price in the first period c. Products that will become obsolete should be priced lower than those that retain value over time.

Inventory cost shifting: Researchers have dealt with two forms of inventory cost shifting: consumers can buy more of an item when sold on deal, or they can accelerate their timing of purchase ( for durables, as in an earlier replacement of a car). Blattberg, Eppen, and Lieberman (1981) develop a model in which consumers minimize holding costs while retailers maximize profits subject to the consumers behavior. Consumers are assumed to be one of two types: high or low holding costs. Their model predicts a. The higher the rate of consumption, the lower the degree and the higher the frequency of deals. b. The higher the holding costs, the higher both the degree and frequency of deals. c. The lower the percentage of low holding costs customers, the lower the degree and the higher the frequency of deals. Blattberg and colleagues offer some empirical tests of their model, providing evidence for consumer stockpiling as well as general support for the predictions noted earlier.

Using a different explanation ( consumer search costs versus differentiated holding costs) Salop and Stiglitz demonstrate that a single low price (generated by some retailers offering a promotion) and a single high price are the equilibrium price distribution in a market.

Differential information: In a different article, Salop and Stiglitz (1977)

model a market with informed and uninformed customers, where the latter shop at random while the former shop only at lower priced stores. Their model again yields a two price equilibrium. Varian (1980) argues that uninformed customers become informed by shopping behavior and suggests

that, to maintain the two price equilibrium. The idea here si that promotions capture the informed customers, but are only temporary so they can get full prices sometime from the informed customer.

Price discrimination : Price discrimination is a mechanism that allows

firms to charge different prices to customers with different demand curves. Narasimhans analysis, reviewed earlier, studied coupons as a price discrimination mechanisim,

Brand loyalty: If a market consists of customers who are loyal to a brand

and others who are switchable promotions can be used as bait for the switchers. Narasimhans developed a two-brand model and showed if one firm has more loyal customers that the others, its average prices should be higher and it should run fewer promotions. In a similar vein, raju, Srinivasan, and lal show that strong brands should promote less frequently than weak brands.

Competition : A common explanation for promotions is the familiar

:prisoners dilemma paradox: while it might be jointly optimal for two firms to collude to maintain uniformly higher prices, it is individually optimal for each to cut- price if the other does not. Thus, both firms argue similarly ad both end up promoting.

Operational models of promotion:

The models by Rao and lilien (1972) little and Blattberg and Levin reviewed earlier, all report operational use. Several other operational models have been reported. Abraham and lodish developed a methodology called PROMOTER, extend to PROMTIONSCAN to provide a better baseline for planning promotions and evaluating their effectiveness than a simple before and after analysis. Their model incorporated trends sesonality exception indicies as well as promotional types in a combined multiplicative additive model and is reported to be in regular use.

Neslin and shoemaker develop a decision calculus model aimed at planning coupon promotions. It is similar to BRANDAID, but focuses great detail on the element of coupon promotions. The authors report an application of the model for deciding netween a freestanding insert and a direct mail coupon. Dhebar, neslin and quelch describe a decision calculus model for planning an individual retailer promotion that was developed for an automobile retailer. The model addresses a complex set of issues including repeat sale.trade-ins service contracts, competitive response and the like.

The future of promotion models

The large amount of recent work in the promotional area has been stimulated to a lrge extent by an enormous improvement in the quality of available data. As pointed out by Blattberg and Neslinin the best integrative treatment of the promotions are to date, the term ;promotions are to date the term promotions. we are in the progress of collecting much empirical informations about promotions , but a single dominant theory or model of promotional effectiveness has not emerged.