Page 1 of 20

REVOLOGY ANALYTICS

Revenue Growth Analytics Program

Price Promotions and

Consumer Behavior

Page 2 of 20

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.

©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 2

Page 3 of 20

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.

©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 3

Page 4 of 20

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.

Page 5 of 20

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.

©2023 Revology Analytics Proprietary and Confidential. All Rights Reserved. 5

Page 6 of 20

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.

Page 7 of 20

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).

Page 8 of 20

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

Page 9 of 20

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

Page 10 of 20

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

Page 11 of 20

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

Page 12 of 20

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.

Page 13 of 20

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

Page 14 of 20

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

Page 15 of 20

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%

Page 18 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 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%