Something Free or Something Off? A Comparative Study of the Purchase Effects of Premiums and Price Cuts
48 Pages Posted: 28 Jan 2014
Date Written: January 27, 2014
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
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