Shopper Response to Bundle Promotions for Packaged Goods

Bundle promotions—the practice of granting consumers a discount when they buy a certain number of units from a designated range of stockkeeping units—have gained popularity among manufacturers and retailers. In this research, the authors investigate the purchase effects of bundle promotions for a category of packaged goods. Contrary to intuition, they find that promotional bundles are far more effective at inducing switching than at boosting category sales. The strong switching effects result from two mechanisms: (1) Stockkeeping units that are part of a bundle promotion appear to reinforce each other's choice probability, and (2) the bundle discount tends to attract consumers even if they do not buy enough to qualify for the price reduction. The weak category effects follow from the notion that the purchase quantity requirement is often too stringent to make consumers buy earlier and/or more in the category. The authors develop incidence, quantity, and choice models that incorporate the intricate bundle mechanisms, and they use simulations to contrast the sales impact of bundle and traditional per-unit promotions. On the basis of the model estimates, they present managerial implications and tentative guidelines for optimal bundle design.

[1]  M. Ben-Akiva,et al.  The demand for local telephone service: a fully discrete model of residential calling patterns and service choices , 1987 .

[2]  Bari A. Harlam,et al.  Modeling Consumers’ Choices of Multiple Items , 1995 .

[3]  Peter S. Fader,et al.  Modeling Consumer Choice among SKUs , 1996 .

[4]  James M. Lattin,et al.  A Two-State Model of Purchase Incidence and Brand Choice , 1991 .

[5]  Catherine L. Kling,et al.  Testing The Consistency of Nested Logit Models with Utility Maximization , 1996 .

[6]  S. Siddarth,et al.  Modelling the effect of purchase quantity on consumer choice of product assortment , 1998 .

[7]  S. Chib,et al.  Posterior Simulation and Bayes Factors in Panel Count Data Models , 1998 .

[8]  Dominique M. Hanssens,et al.  The Long-Term Effects of Price Promotions on Category Incidence, Brand Choice, and Purchase Quantity , 2002 .

[9]  Moshe Ben-Akiva,et al.  Consumption Patterns and Self-selecting Tariffs , 1989 .

[10]  V. Padmanabhan,et al.  The Decomposition of Promotional Response: An Empirical Generalization , 1999 .

[11]  K. B. Monroe,et al.  How Buyers Perceive Savings in a Bundle Price: An Examination of a Bundle's Transaction Value: , 1993 .

[12]  Thomas S. Shively,et al.  A Choice Model for Packaged Goods: Dealing with Discrete Quantities and Quantity Discounts , 2004 .

[13]  K. Sivakumar.  Role of price and quality tiers on the cluster effect in brand choice , 1995 .

[14]  Catherine L. Kling,et al.  An Empirical Investigation of the Consistency of Nested Logit Models with Utility Maximization , 1995 .

[15]  Stephen J. Hoch,et al.  An Anchoring and Adjustment Model of Purchase Quantity Decisions , 1998 .

[16]  Scott A. Neslin,et al.  The Effect of Promotion on Consumption: Buying More and Consuming it Faster , 1998 .

[17]  Yannis Bakos,et al.  Bundling and Competition on the Internet , 1999 .

[18]  William R. Dillon,et al.  A Segment-Level Model of Category Volume and Brand Choice , 1996 .

[19]  D. McFadden,et al.  AN APPLICATION OF DIAGNOSTIC TESTS FOR THE INDEPENDENCE FROM IRRELEVANT ALTERNATIVES PROPERTY OF THE MULTINOMIAL LOGIT MODEL , 1977 .

[20]  A. Goldberger.  The Interpretation and Estimation of Cobb-Douglas Functions , 1968 .

[21]  Praveen K. Kopalle,et al.  The impact of external reference price on consumer price expectations , 2003 .

[22]  Russell S. Winer,et al.  An Empirical Analysis of Internal and External Reference Prices Using Scanner Data , 1992 .

[23]  M. Ben-Akiva,et al.  Discrete choice analysis , 1989 .

[24]  J. Aitchison,et al.  The multivariate Poisson-log normal distribution , 1989 .

[25]  Janet L. Yellen,et al.  Commodity Bundling and the Burden of Monopoly , 1976 .

[26]  M. Whinston.  Tying, Foreclosure, and Exclusion , 1989 .

[27]  P. J. Kuzdrall,et al.  Price Quantity Discounts: Some Implications for Buyers and Sellers , 1987 .

[28]  V. Srinivasan,et al.  Evaluating the Multiple Effects of Retail Promotions on Brand Loyal and Brand Switching Segments , 1992 .

[29]  D. G. Morrison,et al.  A Decision Support System for Planning Manufacturers' Sales Promotion Calendars , 1999 .

[30]  Fred M. Feinberg,et al.  The Shape of Advertising Response Functions Revisited: A Model of Dynamic Probabilistic Thresholds , 2004 .

[31]  G. Tellis,et al.  Strategic Bundling of Products and Prices: A New Synthesis for Marketing , 2002 .

[32]  Fred M. Feinberg,et al.  Do we care what others Get? A Behaviorist Approach to Targeted Promotions , 2002 .

[33]  Bosang Lee.  Calling Patterns and Usage of Residential Toll Service under Self Selecting Tariffs , 1999 .

[34]  Carl F. Mela,et al.  Managing Advertising and Promotion for Long-Run Profitability , 1999 .

[35]  D. McFadden.  Econometric Models of Probabilistic Choice , 1981 .

[36]  V. Rao,et al.  A General Choice Model for Bundles with Multiple-Category Products: Application to Market Segmentation and Optimal Pricing for Bundles , 2003 .

[37]  James D. Hess,et al.  Why Do Hot Dogs Come in Packs of 10 and Buns in 8s or 12s? A Demand-Side Investigation , 1987 .

[38]  Stephen Martin,et al.  Strategic and welfare implications of bundling , 1999 .

[39]  Jie Zhang,et al.  Customizing Promotions in Online Stores , 2004 .

[40]  Wayne D. Hoyer,et al.  Promotion Signal: Proxy for a Price Cut? , 1990 .