وفاداری به برند و استراتژی های ارتقای قیمت : تجزیه و تحلیل تجربی

Though brand loyalty has been studied extensively in the marketing literature, the relationship between brand loyalty and retail pricing strategies is not well understood. Designing promotion strategies involves two key decisions: the percentage reduction in price from the existing price point (depth), and the frequency with which a product is promoted. These decisions, in turn, are critically dependent upon how many consumers can be convinced to switch to a brand by temporarily reducing its price, and how many are instead brand loyal. Theoretical models of how the strength of brand loyalty influence optimal promotion strategies have been developed, but there are no rigorous tests of their hypotheses that take into account wholesale price variation. We test how brand loyalty impacts promotion strategies for two frequently purchased consumer packaged good categories. Our results confirm that retailers promote strong brands shallower and more frequently compared to brands with weak loyalty. Our results highlight the importance of carefully modeling wholesale prices when testing behavioral models on retail pricing.

Recent estimates indicate that consumer packaged good manufacturers allocate fully 58% of their marketing expenditure toward sales promotion (Low and Mohr 2000). Although not all of this investment is passed through to consumers by retailers, the importance of retailers’ promotion decisions to their own economic performance is clear. What drives promotion by retailers, however, is only partly understood. While much of the early research focused exclusively on demand-side explanations for observed promotion behavior (Varian 1980 and Butters 1977), more recent studies combine cost and demand considerations (Agrawal 1996 and Gedenk and Neslin 1999; Raju, Srinivasan, and Lal 1990). Explaining how retailers make promotion decisions, and what these decisions are, is critical to understanding the retailing function more generally. In general, we know that retailers promote products because they can derive higher margins by price discriminating between groups of high and low demand. One way of defining high versus low demand considers whether consumers are brand loyal. Consumers often express loyalty to a particular consumer packaged good (CPG), so this study provides an empirical examination of how brand loyalty influences retail price-promotion decisions in two highly differentiated, frequently-purchased CPG categories: carbonated soft drinks (CSD) and ice cream.1 There are a number of competing theories as to how price promotions work, but common among them is the notion that the market can be segmented into groups of consumers that vary by the strength of their demand. Strength of demand, in turn, depends on whether the consumer is: informed or uninformed (Burdett and Judd 1983, Carlson and McAfee 1983 and Varian 1980), high search-cost or low search-cost (Rob 1985 and Stigler 1961), high or low willingness-to-pay (Jeuland and Narasimhan 1985 and Pesendorfer 2002), high inventory-cost or low inventory-cost (Aguirregabiria 1999; Blattberg, Eppen, and Lieberman 1981) or are loyal to a brand or store (Agrawal 1996 and Lal and Villas-Boas 1998; Raju, Srinivasan, and Lal 1990; Villas-Boas 1995). Promotions, or sales, allow retailers to price-discriminate between the two groups. For frequently-purchased consumer goods, however, information or inventory-based explanations are not likely given the nature of the product, so loyalty or intensity of demand is the more plausible explanation. Moreover, because loyalty and intensity are empirically similar according to the definition used by Agrawal (1996), we focus on brand loyalty to explain two aspects of promotion design: depth which is defined here as the percentage reduction in price from the existing price, and the frequency, or average number of times an individual brand is promoted over a specified time period (a year for example) ( Raju 1992 and Srinivasan et al. 2004). Recognizing the connection between brand loyalty and promotion is not new. Raju, Srinivasan, and Lal (1990) develop a theoretical model of manufacturer competition that explains how differences in consumer loyalty leads to variations in the depth and frequency of price promotions offered by brands in the same product category. Recognizing that consumers buy from retailers, not manufacturers, Agrawal (1996) extends the theoretical model of Raju, Srinivasan, and Lal (1990) to include pricing behavior by retailers and the effect manufacturer advertising levels have on retailers’ promotion decisions. His model suggests that a retailer will offer deeper discounts for brands with little brand loyalty, but promote them less often. Similarly, Jing and Wen (2008) assume consumers will switch to a preferred brand given a sufficient price discount, but also include the possibility of a consumer segment that is completely price sensitive. They find that the equilibrium promotional strategy depends critically on brand strength and the number of price sensitive consumers, therefore, models of brand loyalty and promotion should allow for switching behavior by consumers. We allow for both loyalty and brand substitution in our empirical models of CSD and ice cream demand. It is also well-understood that retail pricing is strongly influenced by wholesale prices, although retail pass-through is not necessarily perfect (Nijs et al. 2010). This observation presents an empirical problem for researchers interested in explaining retail pricing decisions, however, as wholesale prices are rarely observed (Berto Villas-Boas 2007). Consequently, we estimate a model of vertical pricing relationships in both the CSD and ice cream markets to recover wholesale prices under only weak assumptions regarding wholesaler and retailer conduct. In this way, we are able to isolate changes in retail prices that are due solely to profit-maximizing decisions by retailers, conditioned on the prices they pay to wholesalers. We empirically model the relationship between the strength of brand loyalty and retail promotion decisions, while controlling for variation in unobserved wholesale prices. Retailers are assumed to make two related decisions when promoting a particular brand: (1) the depth of the promotion, and (2) the frequency of promotions for that brand. As such, our study contributes to the literature on retail pricing and brand loyalty. Namely, our study is the first to investigate how brand loyalty affects the key decisions retailers face in designing promotions (depth and frequency) while accounting for variation in unobserved wholesale prices. While others admit the central role played by wholesalers in the retail promotion decision, none incorporate wholesale price information into their empirical analysis. Unobserved wholesale prices are included in our analysis using methods recently developed in the empirical industrial organization and quantitative marketing literatures. This empirical framework allows us to test a number of hypotheses that emerge from the theoretical literature on the relationship between brand loyalty and the depth and frequency of promotion. The first hypothesis is that the average price discount at the retail level is negatively related to the strength of brand loyalty (Agrawal 1996). The second maintains that the frequency of price promotions is positively related to the strength of loyalty (Agrawal 1996). Our findings broadly support both hypotheses, even after controlling for variation in wholesale prices. The intuition behind these findings is straightforward – if retailers deeply discount strong brands, they not only forgo the price premium, but also the potential margin made on the weaker brand. Promotion decisions made by retailers differ from those made by manufacturers (Raju, Srinivasan, and Lal 1990), because retailers are concerned with category profit and not the profit from individual brands. The remainder of the paper is organized as follows. In the next section, we provide a theoretical justification for the hypotheses tested with the empirical model. In the third section we describe the empirical techniques used to determine the relationship between brand loyalty and retail price promotions. We start by giving a general overview of the section followed by a description of the household demand model used to measure brand loyalty, then the market demand model used to estimate the wholesale prices paid by retailers. We conclude the third section with a detailed explanation of the retail price promotion models. The fourth section describes the econometric methods used to estimate each of the models. The fifth describes the data used in our empirical application while the results are presented in the sixth section. The final section concludes, offering some implications for the interaction between brand loyalty and promotional relationships in practice, and provides suggestions for future work in the area.

Most theoretical explanations of price promotions rely on some form of price discrimination between identifiable market segments. There are few empirical tests of how the nature of these segments – how large they are or how strong their membership – influences retailers’ price promotion strategies. In this study, we develop and test an empirical model of price promotion in which brand loyalty determines the depth and frequency of discounts. Our econometric model is estimated in three stages for two different product categories: carbonated soft drinks and ice cream. In the first stage we model household demand using a random coefficient logit specification yielding estimates of brand loyalty. In the second stage, we estimate a market demand model which allows us to estimate the wholesale price each retailer observes for each brand. The third stage of the model determines how the strength of brand loyalty influences retail promotion decisions, defined in terms of their depth and frequency, conditional on estimates of the wholesale price. In particular, we model the frequency and depth of retail promotion as functions of the strength of loyalty to a particular brand and test hypotheses regarding these relationships developed in the theoretical literature. The results of our retail price promotion model are consistent with existing theory on the relationships between brand loyalty and the depth and frequency of price promotion. We find that retailers should promote weaker brands more aggressively than strong brands when designing price promotions. By not aggressively pricing weak brands retailers will forego their margin because consumers loyal to a strong brand will not switch. Our findings also suggest that weaker brands are promoted less frequently compared to stronger brands. Because the stronger brand commands a significant price premium among its loyal consumers the retailer enjoys a higher margin on the stronger brand even after a price promotion so it is naturally discounted more often compared to the weaker brand. In general, while the strength of a brand's loyalty is certainly an important determinant in a retailer's decision to discount, we find that the wholesale price has a significant effect on the retailer's price promotion strategy. Consequently, our results suggest that it is important to take this crucial aspect of the retailer's decision into account when testing the relationship between brand loyalty and retail price promotion. As the article shows, while the specific wholesale prices may not be available, they can be recovered with minimal assumptions and market level retail data. There are several managerial implications from our results. First, retailers should not pass on shallow trade deals from manufacturers of weak brands. Since the price promotion that results from such trade deals will not be enough to overcome the loyalty of the strong brand consumer and make the promotion profitable, retailers should instead sell both brands to the respective loyal cohorts and pocket the added margin. As a corollary, retailers should also be cautious when offering really deep price promotions because these can have a detrimental effect on brand preference over time (DelVecchio, Henard, and Freling 2006). Second, Promotions can re-set consumers’ reference prices for frequently purchased brands such that they become reluctant to purchase at the brand's normal, or non-discounted price (Kalwani and Yim 1992). If consumer's references prices are adjusted down they may shy away from making a category purchase all together which will significantly decrease category profits. Therefore, retailers should be cautious in too frequently passing trade deals through to the consumer and make sure that category sales in the long run are not adversely affected. Third, retailers should use a HI-LO pricing strategy instead of an EDLP strategy. Our empirical results show that the wholesale price has a significant effect on retailer's promotion decisions and EDLP strategies often result in few, if any trade deals offered by manufacturers (Bearden and Rose's 1998). Fourth, new and/or unfamiliar brands should avoid price promotions and instead use other advertising techniques such as in store sampling. Finally retailers are encouraged to use coupons as the primary means of price promotion. The effort needed to redeem the coupon on the part of the consumer points the consumer's reasoning for making a brand selection in the direction of their brand affinity instead of the promotion itself. Moreover coupons have the added benefit of increasing profits by capturing new market share via the discounted price, while also retaining the higher price for those consumers already loyal to the particular brand being discounted. There is much that remains for both theoretical and empirical research. First, retailers may not behave as local monopolists. If retailers instead make decisions regarding promotion depth and frequency in a strategic way, then our hypotheses may be significantly different, and certainly more complicated. Further, future empirical research would benefit from studying the effect of a price sensitive segment on retailers’ promotional strategies. If researchers could identify the size of such a segment, it would be possible to provide insight into the effect of the degree of brand loyalty on retailers’ incentives to offer price promotions. Future theoretical research in the study of retailer promotional strategies may consider markets that consist of more than two brands. Most retail markets are inherently multiproduct so such models are likely to be more relevant than those currently in the literature. Accordingly, one could investigate the possibility of complementary products and their effect on retailer's promotional decisions. Research may also benefit from looking at the dynamic long run game theoretic aspects of promotional strategies. This would allow models to relax the assumption that the manufacturer sets prices simultaneously, and assume a sequential price setting game. This is a more realistic assumption and would allow theoretical applications to investigate the effect trade deals have on the opposing manufacturer and the resulting equilibrium. Lastly, theoretical extensions to markets whereby two manufacturers sell multiple brands would certainly have relevance. Because many highly concentrated industries have only a few manufacturers selling multiple products, it follows that individual manufacturers may be able to capitalize on varying degrees of brand loyalty within their own product listing, and offer trade deals to retailers accordingly.