Consumer heterogeneity in the longer-term effects of price promotions

Abstract

While a significant literature has emerged recently on the longer-term effects of price promotions, as inferred from persistence models, there is very little if any attention paid to whether such longer-term effects vary across different types of consumers. This paper takes a first step in that direction by exploring whether the adjustment, permanent, and total effects of price promotions, and the duration of the adjustment period, differ between consumers segmented based on their usage rates in a product category and their loyalty to a brand. We also investigate whether such consumer segmentation will improve the forecasting performance of persistence models at both product category and brand levels. Expectations are developed based on consumer behavior theory on various effects of price promotions, such as the post-deal trough, the mere purchase effect, the promotion usage effect, and responsiveness to competitor's reactions. Evidence from household-level supermarket scanner data on four product categories is provided. We find substantial differences between consumer segments and provide insights on how managers can increase the longer-term effectiveness of price promotions by targeting each consumer segment with a different promotion program. In addition, consumer segmentation is found to significantly improve the forecasting performance of the persistence model for two of the four product categories. For the other two product categories, consumer segmentation provides forecasting performance similar to that obtained from aggregate-level persistence models.