Do Promotions Benefit Manufacturers, Retailers or Both?

49 Pages Posted: 20 Feb 2003

See all articles by Shuba Srinivasan

Shuba Srinivasan

Boston University - Questrom School of Business

Koen H. Pauwels

Ozyegin University

Dominique M Hanssens

University of California, Los Angeles (UCLA) - Anderson School of Management

M. G. Dekimpe

Catholic University of Leuven (KUL) - Department of Applied Economics; Erasmus Research Institute of Management (ERIM)

Date Written: 27 2002 2,

Abstract

While there has been strong managerial and academic interest in price promotions, much of the focus has been on the impact of such promotions on category sales, brand sales and brand choice. In contrast, little is known about the long-run impact of price promotions on manufacturer and retailer revenues and margins, although both marketing researchers and practitioners consider this a priority area (Marketing Science Institute 2000). Do promotions generate additional revenue and for whom? Which brand, category and market conditions influence promotional benefits and their allocation across manufacturers and retailers?To answer these questions, we conduct a large-scale econometric investigation of the effects of price promotions on manufacturer revenues, retailer revenues and margins. This investigation proceeds in two steps. First, persistence modeling reveals the short- and long-run effects of price promotions on these performance measures. Second, weighted least-squares analysis shows to what extent brand and promotion policies, as well as market-structure and category characteristics, influence promotional impact. A first major finding of our paper is that price promotions do not have permanent monetary effects for either party. Second, in terms of the cumulative, over-time, promotional impact on their revenues, we find significant differences between the manufacturer and retailer. Price promotions have a predominantly positive impact on manufacturer revenues, but their effects on retailer revenues are mixed. Retailer (category) margins, in contrast, are typically reduced by price promotions. Even when accounting for cross-category and store-traffic effects, we still find evidence that price promotions are typically not beneficial to the retailer. Third, our results indicate that manufacturer revenue elasticities are higher for promotions of small-share brands and for frequently promoted brands. Moreover, they are higher for storable products and lower in categories with a high degree of brand proliferation. Retailer revenue elasticities, in turn, are higher for brands with frequent and shallow promotions, for storable products and in categories with a low extent of brand proliferation. As such, from a revenue-generating point of view, manufacturer and retailer interests are often aligned in terms of which categories and brands to promote. Finally, retailer margin elasticities are higher for promotions of small-share brands and for brands with infrequent and shallow promotions. Thus, the implications with respect to the frequency of promotions depend upon the performance measure the retailer chooses to emphasize. The paper discusses the managerial implications of our results for both manufacturers and retailers and suggests various avenues for future research.

Keywords: long-term profitability, sales promotions, category management, empirical generalizations, vector-autoregressive models

JEL Classification: M, M31

Suggested Citation

Srinivasan, Shuba and Pauwels, Koen H. and Hanssens, Dominique M and Dekimpe, Marnik, Do Promotions Benefit Manufacturers, Retailers or Both? (27 2002 2,). ERIM Report Series Reference No. ERS-2002-21-MKT. Available at SSRN: https://ssrn.com/abstract=370964

Shuba Srinivasan

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
6173535978 (Phone)
6173534098 (Fax)

HOME PAGE: http://smgnet.bu.edu/mgmt_new/profiles/SrinivasanShuba.html

Koen H. Pauwels

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

HOME PAGE: http://www.marketdashboards.com

Dominique M Hanssens

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4497 (Phone)
310-206-7422 (Fax)

HOME PAGE: http://www.anderson.ucla.edu/faculty/dominique.hanssens/

Marnik Dekimpe (Contact Author)

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium
+32 16 326 957 (Phone)
+32 16 326 732 (Fax)

HOME PAGE: http://www.econ.kuleuven.ac.be/tew/academic/market/members/MarnikDekimpe.htm

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1715/9576 (Phone)
+31 10 408 9011 (Fax)

HOME PAGE: http://web.eur.nl/fbk/dep/dep3/about/members/people/mdekimpe

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