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Assignment on Promotion Models
Submitted By:
Name : Rohit sankpal
Class : Marketing A
Roll no: 010156
Submitted to
Jyoti mam
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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
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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
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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
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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.
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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.