Promotion Models

8/3/2019 Promotion Models

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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 chosencustomer being in the target market, is an increasing funciton of (1-

m).

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 thefollowing 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 whichconsumers 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 allowsfirms 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

information’s about promotions , but a single dominant theory or model of

promotional effectiveness has not emerged.

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Promotion Models