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Optimizing time-limited price promotions

Research paper by Richard C. Hanna, Scott D. Swain; Paul D. Berger

Indexed on: 25 Nov '16Published on: 10 Nov '16Published in: Journal of Marketing Analytics



Abstract

Abstract Prior research involving promotional response models has largely overlooked the impact of time limits on customer response. We address this issue by developing a price-promotion model in which time limits are conceptualized not only in terms of their effects on customer awareness but also customer urgency. Further, the proposed model incorporates recent insights from behavioral research which indicates that time limits can either enhance or diminish the effects of discount incentives. A key advantage of our approach is that it places minimal demands on managers’ resources, while also leveraging their unique knowledge of the market. In collaboration with an online retailer who frequently uses price promotions, we examine a real-world promotion and illustrate the insights facilitated by the model. In this empirical context, urgency declines with longer time limits but it does so less steeply when accompanied by larger discounts. Additionally, the managers learned that they tend to use time limits that are too long and discounts that are too small, resulting in foregone profits. We conclude by demonstrating the value of sensitivity analyses for understanding how profits can vary with changes in the environment and with differences in the accuracy of managers’ knowledge about customer responsiveness.AbstractPrior research involving promotional response models has largely overlooked the impact of time limits on customer response. We address this issue by developing a price-promotion model in which time limits are conceptualized not only in terms of their effects on customer awareness but also customer urgency. Further, the proposed model incorporates recent insights from behavioral research which indicates that time limits can either enhance or diminish the effects of discount incentives. A key advantage of our approach is that it places minimal demands on managers’ resources, while also leveraging their unique knowledge of the market. In collaboration with an online retailer who frequently uses price promotions, we examine a real-world promotion and illustrate the insights facilitated by the model. In this empirical context, urgency declines with longer time limits but it does so less steeply when accompanied by larger discounts. Additionally, the managers learned that they tend to use time limits that are too long and discounts that are too small, resulting in foregone profits. We conclude by demonstrating the value of sensitivity analyses for understanding how profits can vary with changes in the environment and with differences in the accuracy of managers’ knowledge about customer responsiveness.