The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications

Kopalle, Praveen K.; Mela, Carl F.; Marsh, Lawrence
September 1999
Marketing Science;1999, Vol. 18 Issue 3, p317
Academic Journal
Baseline sales measure what retail sales would be in the absence of a promotion (Abraham and Lodish 1993), and models that measure baseline sales are widely used by managers to assess the profitability of promotions (Buchlin and Gupta 199 -this issue). Estimates of baseline sales and promotional response are typically independent of past promotional activity, even though there is evidence to suggest that increased discounting reducess off-promotion sales and increases the percentage of purchases made on deal (e.g., Krishna 1994). As a result, models that do not consider dynamic promotional effects can mislead managers to overpromote. Given the widespread use of "static" models to evaluate the efficacy of promotions. it is particularly desirable to calibrate a dynamic brand sales model and use it to establish in optimal course of action. Accordingly, we develop a descriptive dynamic brand sales model and use it to determine normative price promotion strategies. Our descriptive approach consists of estimating a varying-parameter sales response model. Letting model parameters vary with past discounting activity accommodate' the possibility that market response changes with firms' discounting policies. In the normative model, we use the estimates obtained in the descriptive model to deter- mine optimal retailer and manufacturer prices over time. The results of the descriptive model indicate that promotions have positive contemporaneous effects on sales accompanied by negative future effects on baseline sales The results of the normative model suggest that the higher-share brands in our data tend to overpromote while the lower- Than: brands do not promote frequently enough. We project that the use of our model could improve manufacturers' provability as much as 7% to 31%. More generally, the normative results indicate that i) if deals become more effective in the current period, i.e., if consumers are more price sensitive, promotions should be used more frequently, and ii) as, the negative dynamic effect of discounting on sales increases, the optimal level of discounting should go down. Without our approach, it would be difficult to mike this trade-oil exact. Finally, we demonstrate that these dynamic effects provide another perspective to the marketing literature regarding the existence of promotions.


Related Articles

  • SALES PROMOTION AS AN ANTECEDENT OF SALES VOLUME: A STUDY OF SELECTED MANUFACTURING INDUSTRY IN IBADAN, SOUTH WESTERN, NIGERIA. Amusat, W. A.; Adejumo, D. A.; Ajiboye, F. A. // Interdisciplinary Journal of Contemporary Research in Business;Mar2013, Vol. 4 Issue 11, p465 

    This research paper investigates the effect of sales promotion dimensions on sales volume with a special reference to the selected manufacturing industry in Ibadan, south western Nigeria. Structure questionnaire was used to collect data from eighty (80) respondents through simple random sampling...

  • Same-Store Sales Enjoy Small Rebound.  // Home Textiles Today;5/16/2005, Vol. 26 Issue 35, p19 

    Reports on the same-store retail sales for May 2005. Comparison of sales between department stores and discounters; Performance of the different merchandise categories.

  • Retail Power: Monster or Mouse? Farms, Paul W.; Ailawadi, Kusum L. // Journal of Retailing;Winter92, Vol. 68 Issue 4, p351 

    Many industry observers contend that retailers have increased their power relative to manufacturers over the past twenty years. The alleged growth in trade power has been attributed to higher concentration of retail buying power, buyers who have access to scanner information, and more frequent...

  • Delhaize Drives Profit Gains. Springer, Jon // SN: Supermarket News;11/9/2009, Vol. 57 Issue 45, p6 

    The article reports that Delhaize Group SA drove a quarterly increase in earnings and said operating profits would be higher for the fiscal year 2009 than its previous forecasts. For the third quarter, which ended September 30, the retailer said net profits increased 10.1% at identical exchange...

  • Nicht unnötig (früh) reduzieren!  // Lebensmittel Zeitung;11/28/2013, Issue 48, p1 

    The article presents information on the economic aspects of the seasonal sale promotion of the German retail industry, which will start on January 27, 2014. Other topics mentioned in this article include clothing prices, the influence of the weather on the German retail and clothing industry, as...

  • Cost Declines Go to Promotions at Harris Teeter. Springer, Jon // SN: Supermarket News;2/9/2009, Vol. 57 Issue 6, p8 

    The article discusses the challenges being faced by retailers in keeping their business in flow. As reported, manufacturers of branded goods aren't lowering prices as much as retailers want, and whatever money retailers save will have to be plowed back into promotional pricing to keep traffic up...

  • Retail Stocks Down As Rough B-T-S Seen. Clark, Evan; Lynch, Matthew // WWD: Women's Wear Daily;8/11/2009, Vol. 198 Issue 30, p14 

    The article reports that retail shares ended a two-day winning streak with a 2 percent decline in the U.S. Citi analyst Deborah Weinswig stated that comparable-store sales at broadline retailers are forecast to fall 3 to 4 percent for August-September 2009. She said that retailers could become...

  • Italian retail sales. Investor's Business Daily // Investors Business Daily;11/26/2014, pA02 

    Italian retail sales fell 0.1% in Sept., the 5th straight monthly decline and defying forecasts for a 0.2% rise. Sales fell 0.5% vs. a year ago.

  • Q2 Sales, Profit Recovery Seen; Hiring on Hold. Vyas, Rajiv // Orange County Business Journal;5/6/2002, Vol. 25 Issue 18, p3 

    Reports that businesses in Orange County, California, are expecting sales and profit gains in the second quarter of 2002 but are not planning to hire or restock their warehouses, according to a university study. Sales performance during the first quarter; Faster increase in operating profits...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics