The Optimal Choice of Promotion Vehicles: Front-Loaded or Rear-Loaded Incentives?

Management Science, Vol. 46, No. 3. (Mar., 2000), pp. 348-362

19 Pages Posted: 21 Jan 2015

See all articles by Z. John Zhang

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Aradhna Krishna

University of Michigan, Stephen M. Ross School of Business

Sanjay K. Dhar

University of Chicago - Marketing Management

Date Written: 2000

Abstract

We examine the key factors that influence a firm's decision whether to use front-loaded or rear-loaded incentives. When using price packs, direct mail coupons, FSI coupons or peel-off coupons, consumers obtain an immediate benefit upon purchase or a front-loaded incentive. However, when buying products with in-pack coupons or products affiliated with loyalty programs, promotion incentives are obtained on the next purchase occasion or later, i.e., a rear-loaded incentive. Our analysis shows that the innate choice process of consumers in a market (variety-seeking or inertia) is an important determinant of the relative impact of front-loaded and rear-loaded promotions. While in both variety-seeking and inertial markets, the sales impact and the sales on discount are higher for front-loaded promotions than for rear-loaded promotions, from a profitability perspective, rear-loaded promotions may be better than front-loaded promotions. We show that in markets with high variety-seeking it is more profitable for a firm to rear-load, and in markets with high inertia it is more profitable to front-load. Model implications are verified using two empirical studies: (a) a longitudinal experiment (simulating markets with variety-seeking consumers and inertial consumers) and (b) market data on promotion usage. The data in both studies are consistent with the model's predictions.

Suggested Citation

Zhang, Z. John and Krishna, Aradhna and Dhar, Sanjay K., The Optimal Choice of Promotion Vehicles: Front-Loaded or Rear-Loaded Incentives? (2000). Management Science, Vol. 46, No. 3. (Mar., 2000), pp. 348-362. Available at SSRN: https://ssrn.com/abstract=2552242

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

Aradhna Krishna (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Sanjay K. Dhar

University of Chicago - Marketing Management ( email )

Rosenwald 331C
Chicago, IL 60637
United States
773-702-3005 (Phone)
773-702-0458 (Fax)

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