The Impact of Price Promotions on a Brand's, Market Share, Sales Pattern and Profitability

A model of market response to price promotions reflecting consumer heterogeniety in preferences and promotion responsiveness shows that a brand's market share is effected by the relative frequency of its own promotions and by its preference profile among consumers: widely accepted, smaller preference brands are more likely to gain long run market share through promotion than are widely accepted higher preference brands, ceteris paribus. If consumers respond to promotions by stockpiling, a brand's unpromoted "baseline" sales are depressed by its own promotions. If consumers respond to promotions by increasing the probability of choosing the promoted brand, a brand's unpromoted "baseline" sales are depressed by competitive brands' promotions. The overall profitability of offering price promotions is shown to depend upon the mix of consumers in the marketplace. Consumers who do not respond to promotions and those who respond to promotions by stockpiling the brand they would have chosen anyway decrease the overall profitability of offering promotions. Consumers who respond to promotions by switching to the promoted brand or by buying and consuming more of the promoted brand than they would have had there been no promotion tend to increase the overall profitability of offering promotions. The model is operationalized using UPC scanner panel data on coffee purchases.