Something Free or Something Off? A Comparative Study of the Purchase Effects of Premiums and Price Cuts

48 Pages Posted: 28 Jan 2014

See all articles by Bram Foubert

Bram Foubert

Maastricht University

Charlotte Rolef

IAL-Campus

Els Breugelmans

KU Leuven @ Antwerp

Karen Gedenk

University of Hamburg - Institute for Marketing and Media

Martin Wetzels

Eindhoven University of Technology (TUE) - Eindhoven Center for Innovation Studies (ECIS)

Date Written: January 27, 2014

Abstract

Facing cutthroat price competition, manufacturers and retailers increasingly rely on non-price promotion techniques, such as premium promotions, where consumers receive a free gift with the purchase of a product. Despite the omnipresence of premium promotions, research to date has not fully answered the question whether and under which conditions premiums outperform plain price cuts. We use data from a large online shopping simulation with more than 2,000 consumers to model purchase behavior in response to premiums and price cuts. Our results indicate that the impact of premiums on consumers’ incidence, choice, and quantity decisions is systematically lower than that of equivalent price cuts. However, a premium’s relative underperformance in terms of purchase effects may well be offset by the premium’s cost advantage, especially in hedonic categories and for private label brands. We demonstrate that, as a result, manufacturers and retailers alike may be better off spending their promotion dollars on premiums than on price cuts.

Keywords: Sales Promotion, Premiums, Price Cuts, Retailing, Purchase Decisions

JEL Classification: M31, M39, C12, C13, C33, C35, C39

Suggested Citation

Foubert, Bram and Rolef, Charlotte and Breugelmans, Els and Gedenk, Karen and Wetzels, Martin, Something Free or Something Off? A Comparative Study of the Purchase Effects of Premiums and Price Cuts (January 27, 2014). Available at SSRN: https://ssrn.com/abstract=2385982 or http://dx.doi.org/10.2139/ssrn.2385982

Bram Foubert (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Charlotte Rolef

IAL-Campus ( email )

Lepperhammer 2
Engelskirchen, 51766
Germany

Els Breugelmans

KU Leuven @ Antwerp ( email )

Department of Business Studies
Korte Nieuwstraat 33
Antwerp, 2000
Belgium

Karen Gedenk

University of Hamburg - Institute for Marketing and Media ( email )

Welckerstrasse 8
Hamburg, 20354
Germany

Martin Wetzels

Eindhoven University of Technology (TUE) - Eindhoven Center for Innovation Studies (ECIS) ( email )

PO Box 513, 5600 MB
NL-5600 MB Eindhoven
Netherlands
+31 40 2473841 (Phone)
+31 40 2465949 (Fax)

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