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REVOLOGY ANALYTICS
Revenue Growth Analytics Program
Price Promotions and
Consumer Behavior
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Dual Entitlement Principle in Pricing
Giving reasons for price increases is
generally helpful.
Transparency builds trust, and consumers are more
understanding when they know the rationale behind pricing
decisions.
Clear communication about price changes can mitigate
potential negative reactions and reduce customer churn.
Higher prices due to cost increases are viewed as fair.
Price differentiation is accepted if
the lower price seems achievable.
If consumers believe they can obtain a product at a
discounted price through legitimate means (e.g., loyalty
programs, bulk purchases), they're more accepting of varying
price points.
Consumers largely perceive they are
entitled to reasonable pricing.
Brands that are perceived as overcharging can face backlash,
negatively impacting their reputation and customer loyalty.
Abnormally high profits by firms are
viewed as unfair, especially in times
of demand/supply imbalances.
In situations like natural disasters or pandemics, price
gouging is not only perceived negatively but can also be
illegal in many jurisdictions.
Consumers expect firms to act responsibly and ethically,
especially during times when essential goods are in short
supply.
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Understanding Prospect Theory in Pricing Strategy
Prospect theory was developed to understand deviations from the
economic models of rationality.
Prospect theory often guides pricing strategies in industries where
price sensitivity varies depending on the perceived value of the
product.
This theory illustrates the asymmetric, nonlinear treatment of people's
perception of gains and losses.
People value gains and losses differently (aka loss aversion).
For instance, consumers might be more sensitive to a price increase (a loss)
than to an equivalent price decrease (a gain).
Similarly, they might react differently to a discount offered on a high-priced
item versus a low-priced item, even if the percentage discount is the same.
Industry examples:
Hospitality industry, where room rates are adjusted according to market conditions.
Airlines: Flight prices fluctuate depending on the season and booking frequency.
E-commerce: Flash sales or limited-time offers might be used to prompt quick purchases.
Consumer Products: A popular sneaker brand might release a limited edition at a higher price,
knowing fans perceive its value as unique and are willing to pay more.
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Using prospect theory to inform pricing strategy and customer behavior
Consumers view price increases as a loss and view discounts as a
gain, thus discounts are favorable over surcharges.
Small discounts have disproportionate effects, while larger
discounts have less effect.
Be aware of diminishing returns from customer value perception
as the discount increases (i.e. nonlinear promotional elasticities).
The price response curve and prospect theory deal with different
aspects of market reaction and customer perception.
The price response curve quantifies how demand changes with
price changes, providing a direct view of market behavior and
elasticities.
Prospect theory, on the other hand, delves into the psychological
aspects of decision-making, revealing how consumers perceive
and react to different pricing strategies.
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Impact of Psychological Aspects on Pricing Optimization
A purely analytical or traditional
microeconomic approach towards price
optimization is often inadequate due to
consumer behavior's irrational aspects.
Assessing psychological aspects,
including how price changes and
promotions are framed, can maximize
both sales and customer satisfaction
while also maintaining or increasing
profitability.
i.e. a discount might be more appealing if framed
as a limited-time offer, creating a sense of urgency,
rather than just a price reduction.
The perception of pricing change rests on
how the price is presented and packaged,
the perceived seller's fairness (profit,
future prices), and perceived fairness
relative to what other customers receive.
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Psychological Aspects of Pricing
Reference Pricing: How consumers form a reference
price affects their purchase decisions.
Time-limited promotional prices may result in
consumers forming a lower reference price.
Prospect theory application: Consumers respond
unfavorably to price increases and more favorably to
price discounts, but with diminishing returns.
Perception of fairness: Consumers’ satisfaction with
a purchase can change based on their perceived
fairness of the offer.
Offering achievable promotions to all consumers
can improve perception of fairness.
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Importance of Reference Pricing
Certain products serve as reference points for determining a
store's price competitiveness.
The price range (or price dispersion) for frequently bought
items tends to be small, while that of less frequently bought
items is wide.
Nowadays, technology enables frequent (i.e. intra-day) price
transparency for many industries, especially (online) retail.
CPG is uniquely well-positioned to monitor competitor
(manufacturers), distributor and retailer costs and prices
(syndicated data).
Milk, for instance, is an item consumers frequently buy and are
very price-aware.
If milk isn't priced competitively, the store may be perceived as
expensive.
Several APIs and services available to crawl websites of popular
retailers and capture product information and prices (e.g.:
ScrapeHero, Dataforest, Pricefy, Prisyn, among others).
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Reference Pricing and Its Effects
Reference pricing influences a buyer's perception of a
product's value and their sensitivity to its price.
Altering the price for a product for extended periods can
impact the perceived value, affecting future sales.
Temporary price promotions can unknowingly change a
product’s reference price for consumers.
Consumer response to price changes is dependent on whether the price is
above or below their reference price.
Reference-price effects are vital for both short-term
success and potential long-term sales implications.
Immediate Impact: A pricing decision can immediately boost sales volumes
or profit margins, depending on the strategy used.
Brand Loyalty: Over time, consistent and fair pricing can enhance brand
loyalty and customer retention.
©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 8
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Store Effects and Cross-category Effects
Promotions can increase sales in complementary product categories.
Secondary products often enhance or augment the primary product.
For instance, a discount on chips might boost sales of salsa or dip; discounted grill might boost sales of grilling
accessories.
Recognizing these relationships (via market basket / affinity analysis) is crucial: retailers can strategically place
and promote complementary products together to maximize the cross-category lift.
Both store and brand switching exist and have implications for retailers.
Store switching is often related to geographic proximity.
There are direct and indirect effects of store switching.
Direct effects include immediate sales gains from new customers.
Indirect effects can involve longer-term shifts in shopping patterns or word-of-mouth benefits.
Given similar products, customers often opt for the least expensive option.
Price remains a significant factor in decision-making, especially for undifferentiated products.
Introducing a higher-priced level can shift preference towards a mid-priced
option (aka. “Decoy effect”)
Retailers can use this strategy to encourage sales of specific products or to increase average transaction values.
©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 9
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Post-promotion Sales Dips
Post-promotion dips can be identified through careful time-series regressions with
large sample sizes.
Account for external influences like seasonality, competitor actions, or economic factors to isolate the true impact of
promotions.
Post-promotion sales dips often unnoticed due to factors like deal-to-deal buying,
increased consumption, competitive promotions, and lack of consumer inventory
sensitivity.
Post-promotion dips: Decrease in sales after a promotion ends, as consumers utilize their stockpiled inventory.
©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 10
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The Role of Stockpiling in Sales Promotions
Stockpiling, influenced by promotions, is supported by
consumer trade-off of inventory costs vs price.
Consumers perceive that buying in bulk during promotions saves them
money in the long run despite the immediate cost.
The convenience of having products on hand and fewer shopping trips can
also motivate stockpiling.
Higher inventory levels lead to changed consumption rates -
households consume more when they have more stock.
The significant effect of promotions on inventory levels, consumption
rates, and usage patterns has been supported by research.
Retailers and manufacturers must consider the long-term impact of
promotions on sales and inventory cycles.
Stockpiling can impact consumer perception of sunk costs,
influencing usage patterns.
They perceive that they've already "paid" for the product, making them
less hesitant to use or waste it.
This perception can lead to quicker product usage and a reduced feeling of
the need to conserve.
Income level does not correlate with stockpiling behavior.
Both high and low-income households can engage in stockpiling when they
perceive a good deal.
©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 11
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Stockpiling - cont’d
Promotion strategies create lagged and lead effects on sales due to
stockpiling and deceleration.
Higher stockpiling and deceleration seen among high-priced, frequently
promoted, and high-market-share brands.
A promotion can also make consumers put offtheir purchases until a deal
is available (purchase deceleration)
Direct and indirect effects of promotions can result in consumers
switching stores.
Promotions can result in increased consumption or simply shift purchases
in time.
Higher inventory levels are often associated with higher consumption
rates.
Promotions can increase category demand in a significant percentage of product
categories.
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Impact on Purchase Occasions, Household Stockouts and Consumption Rate
Purchase acceleration can positively affect related
product categories.
Complementary Goods: If one product is on promotion, consumers might
buy related products to complement their purchase, even if those aren't on
sale.
Halo Effect: A promotion in one category can elevate the entire brand or
store's perception, indirectly boosting sales in other categories.
Promotion stimulates consumption through more
purchase occasions, reduced household stockouts, and
higher consumption rates.
Promotions accelerate category purchases, often leading
to increased quantity purchases.
Perceived Savings: The perception of saving money by buying more during a
sale often outweighs concerns about overspending.
More purchase occasions: Increase in frequency of a
specific product category purchase.
Repeat Business: Regular promotions can incentivize customers to return
more often to the store or site.
Habit Formation: Frequent purchases, driven by promotions, can lead to
habit formation, making it likely that the consumer will keep buying even
post-promotion.
©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 13
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Promotion Effect Decomposition at the Brand-Level
From other
brands in
same store
1
From other
brands in
other stores
2
From same
brand in
other stores
3
From same
brand in
other stores
7
From same
brands in
other stores
6
Past & Future
period
switches
From same
brand in
same store
4
From other
brands in
same store
5
Higher
consumption rate
8
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
=
= +
+
+ +
= + +
+
+
=
New category
users
9
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Promotion Effect Decomposition at the Brand-Level
From other
brands in
same store
1
From other
brands in
other stores
2
From same
brand in
other stores
3
From same
brand in
other stores
7
From same
brands in
other stores
6
Past & Future
period
switches
From same
brand in
same store
4
From other
brands in
same store
5
Higher
consumption rate
8
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
=
= +
+
+ +
= + +
+
+
=
New category
users
9
Retailer's incremental rate
Page 16 of 20
Higher
consumption rate
8
From other
brands in
other stores
2
New category
users
9
From same
brand in
other stores
7
From same
brand in
other stores
3
Promotion Effect Decomposition at the Brand-Level
From other
brands in
same store
1
Past & Future
period
switches
From same
brand in
same store
4
From other
brands in
same store
5
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
=
= +
+
+ +
= + +
+
+
=
Retailer's incremental rate
From same
brands in
other stores
6
Brand's incremental rate
Page 17 of 20
From same
brand in
same store
4
From other
brands in
same store
1
From other
brands in
other stores
2
Higher
consumption rate
8
From other
brands in
same store
5
New category
users
9
From same
brand in
other stores
7
From same
brands in
other stores
6
From same
brand in
other stores
3
Promotion Effect Decomposition at the Brand-Level
Past & Future
period
switches
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
=
= +
+
+ +
= + +
+
+
=
Total Category-expansion effect: 35%
Cross-brand effect: 33%
Cross-brand effect: 32%
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From other
brands in
other stores
2
New category
users
9
Higher
consumption rate
8
From same
brand in
same store
4
From other
brands in
same store
5
From same
brands in
other stores
6
From same
brand in
other stores
3
From same
brand in
other stores
7
From other
brands in
same store
1
Promotion Effect Decomposition
at the Item-Level
Past & Future
period
switches
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
= +
+
+ +
= + +
+
+
=
= +
From other
items of the
same brand in
same store
Page 19 of 20
From other
brands in
other stores
2
New category
users
9
Higher
consumption rate
8
From same
brand in
same store
4
From other
brands in
same store
5
From same
brands in
other stores
6
From same
brand in
other stores
3
From same
brand in
other stores
7
From other
brands in
same store
1
Promotion Effect Decomposition at the Brand-Level
Past & Future
period
switches
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
= +
+
+ +
= + +
+
+
=
= +
From other
items of the
same brand in
same store
0
Page 20 of 20
From other
brands in
other stores
2
New category
users
9
Higher
consumption rate
8
From same
brand in
same store
4
From other
brands in
same store
5
From same
brands in
other stores
6
From same
brand in
other stores
3
From same
brand in
other stores
7
From other
brands in
same store
1
Promotion Effect Decomposition at the Brand-Level
Past & Future
period
switches
Higher
category
consumption
Current period
switches
Gross lift of
promoted
brand
= +
+
+ +
= + +
+
+
=
= +
From other
items of the
same brand in
same store
0
Within-brand referred to as cannibalization
Within-brand between effect Between-brand effect
34%
9%