CHAPTER 2

LITERATURE & THEORETICAL

REVIEWS

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 LITERATURE REVIEW

PROMOTION AND CONSUMPTION

Does consumption respond to promotion? Many studies have focused on the effects of
promotion on brand switching, purchase quantity, and stockpiling and have documented that
promotion makes consumers switch brands and purchase earlier or more. The consumers
consumption decision has long been ignored, and it remains unclear how promotion affects
consumption (Blattberg et al. 1995). Conventional choice models cannot be used to address
this issue because many of these models assume constant consumption rates over time
(usually defined as the total purchases over the entire sample periods divided by the number
of time periods). While this assumption can be appropriate for some product categories such
as detergent and diapers, it might not hold for many other product categories, such as
packaged tuna, candy, orange juice, or yogurt. For these categories, promotion can actually
stimulate consumption in addition to causing brand switching and stockpiling. Thus, for
product categories with a varying consumption rate, it is critical to recognize the
responsiveness of consumption to promotion in order to measure the effectiveness of
promotion on sales more precisely.

Emerging literature in behavioural and economic theory has provided supporting evidence
that consumption for some product categories responds to promotion. Using an experimental
approach, Wansink (1996) establishes that significant holding costs pressure consumers to
consume more of the product. Wansink and Deshpande (1994) show that when the product is
perceived as widely substitutable, consumers will consume more of it in place of its close
substitutes. They also show that higher perishability increases consumption rates. Adopting
scarcity theory, Folkes et al. (1993) show that consumers curb consumption of products when
supply is limited because they perceivesmaller quantities as more valuable. Chandon and
Wansink (2002) show that stockpiling increases consumption of high convenience
productsmore than that of low-convenience products. In an analytical study, Assuncao and
Meyer (1993) show that consumption is an endogenous decision variable driven by
promotion and promotion-induced stockpiling resulting from forward-looking behaviour.
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There are some recent empirical papers addressing the promotion effect on consumer
stockpiling behaviour under price or promotion uncertainty. Erdem and Keane (1996) and
Gonul and Srinivasan (1996) establish that consumers are forward looking. Erdem et al.
(2003) explicitly model consumers expectations about future prices with an exogenous
consumption rate. In their model, consumers form future price expectations and decide when,
what, and how much to buy. Sun et al. (2003) demonstrate that ignoring forward looking
behaviour leads to an over estimation of promotion elasticity.

SALES PROMOTION AND CONSUMER RESPONSE

Consumer promotions are now more pervasive than ever. Witness 215 billion manufacturer
coupons distributed in 1986, up 500% in the last decade (Manufacturers Coupon Control
Center 1988), and manufacturer expenditures on trade incentives to feature or display brands
totaling more than $20 billion in the same year, up 800% in the last decade (Alsop 1986;
Kessler 1986). So far, not much work has been done to identify the purchasing strategies that
consumers adopt in response to particular promotions, or to study how pervasive these
strategies are in a population of interest. Blattberg, Peacock and Sen (1976) define a
purchase strategy as a general buying pattern which "incorporates several dimensions of
buying behaviour such as brand loyalty, private brand proneness and deal proneness." A
greater understanding of the different types of consumer responses to promotions can help
managers to develop effective promotional programs as well as provide new insights for
consumer behaviour theorists who seek to understand the influence of different types of
environmental cues on consumer behaviour.

Blattberg, Eppen, and Liebermann (1981),Gupta (1988), Neslin, Henderson, and Quelch
(1985), Shoemaker (1979), Ward and Davis (1978), and Wilson,Newman, and Hastak
(1979) find evidence that promotions are associated with purchase acceleration in terms of an
increase in quantity purchased and, to a lesser extent, decreased inter purchase timing.
Researchers studying the brand choice decision-for example, Guadagni and Little (1983)
and Gupta (1988)-have found promotions to be associated with brand switching.
Montgomery (1971), Schneider and Currim (1990), and Webster (1965) found that
promotion-prone households were associated with lower levels of brand loyalty.

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Blattberg, Peacock, and Sen (1976, 1978) describe 16 purchasing strategy segments based
on three purchase dimensions: brand loyalty (single brand, single brand shifting, many
brands), type of brand preferred (national, both national and private label), and price
sensitivity (purchase at regular price, purchase at deal price). There are other variables that
may be used to describe purchase strategies, examples are whether the household purchases a
major or minor (share) national brand, store brand, or generic, or whether it is store-loyal or
not.

McAlister (1983) and Neslin and Shoemaker (1983) use certain segments derived from
those of Blattberg, Peacock, and Sen but add a purchase acceleration variable to study the
profitability of product promotions.

Throughout the world, consumer sales promotions are an integral part of the marketing mix
for many consumer products. Marketing managers use price-oriented promotions such as
coupons, rebates, and price discounts to increase sales and market share, entice trial, and
encourage brand switching. Non-price promotions such as sweepstakes, frequent user clubs,
and premiums add excitement and value to brands and may encourage brand loyalty (e.g.,
Aaker 1991; Shea, 1996). In addition, consumers like promotions. They provide utilitarian
benefits such as monetary savings, added value, increased quality, and convenience, as well
as hedonic benefits such as entertainment, exploration, and self expression (Chandon,
Laurent, and Wansink, 1997).

A large body of literature has examined consumer response to sales promotions, most notably
coupons (e.g.. Sawyer and Dickson, 1984; Bawa and Shoemaker, 1987 and 1989; Gupta,
1988; Blattberg and Neslin, 1990; Kirshnan and Rao, 1995; Leone andSrinivasan, 1996).
Despite this, important gaps remain to be studied. It is generally agreed that sales promotions
are difficult to standardize because of legal, economic, and cultural differences (e.g., Foxman,
Tansuhaj, and Wong, 1988; Kashani and Quelch, 1990; Huff and Alden, 1998). Multinational
firms should therefore understand how consumer response to sales promotions differs
between countries or states or province

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 THEORETICAL REVIEW

PROMOTIONAL STRATEGIES

A marketers job is to build a marketing program to achieve a companys objective. For this,
he has to design and administer various under Four P s of marketing, namely, product, price,
place and promotion. Marketing communication is an important P (also called as promotion)
of marketing.

A promotion strategy is an activity that is designed to help boost the marketing of a product
or service. It is very important as it not only helps to boost sales but it also helps a business to
draw new customers while at the same time retaining older ones. It can be done through an
advertising campaign, public relation activities, a free sampling campaign, a free gift
campaign, a trading stamp campaign, through demonstrations and exhibitions, through prize
giving competitions, through temporary price cuts, and through door-to-door sales,
telemarketing, personal sales letters, and e-mails. Promotion is a reward making activity that
influences people to buy and consume the products of a marketer. The methods and means of
the small scale industrial units are traditional, simple, involve less cost.

Promotion may be defined as the co-ordination of all seller initiated efforts to set up
channels of information and persuasion to facilitate the scale of a good or service.
Promotion is most often intended to be a supporting component in a marketing mix.

Promotion decision must be integrated and co-ordinate with the rest of the marketing mix,
particularly product/brand decisions, so that it may effectively support an entire marketing
mix strategy. The promotion mix consists of four basic elements. They are:-

1. Advertising,
2. Direct Marketing,
3. Personal Selling,
4. Sales Promotion, and
5. Publicity

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Advertising:
It is any paid form of non-personal presentation and promotion of ideas, goods or services by

an identified sponsor.

Direct Marketing:
It refers to the use of mail, telephone and other non-personal contact tools to communicate

with or solicit a response from specific customers and prospects.

Personal Selling:
Face to face interaction with one or more prospective purchasers for the purpose of making a

sale refers to personal selling.

Public Relations and Publicity:

It refers to the variety of programs designed to promote and or protect a companys image or

its individual products.

Sales Promotions:
The short-term incentive to encourage trial or purchase of a product or service refers to sales

promotion. Whereas advertising offers a reason to buy; sales promotion offers an incentive to

buy.

Sales Promotion

Sales promotion refers to the short-term incentives to encourage sales of a product or service.

It consists of a diverse collection of incentive tools, mostly short-term, designed to stimulate

quicker and greater purchase of products or services by consumers.

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Purpose of Sales Promotion
Sales promotion tools vary in their specific objectives. They may be used to attract new

customers, to reward loyal customers and to increase the repurchase rates of occasional users.

Sales promotion usually targets brand switchers because non-users and users of other brands

do not always notice a promotion. Sales promotions are thus also seen as a tool for breaking

down loyalty to other products.

Sales promotions also let manufacturers adjust to short term changes in supply and demand

and differences in customer segments. They also let manufacturers to experiment by varying

prices. Sales promotions also lead to greater consumer awareness of prices.

To use sales promotion, a company must set objectives, select the right tools, develop the best

program and implement it and evaluate the results.

Objectives of Sales Promotion

The specific objectives set for sales promotions will vary with the type of the target market.

For consumer promotions, objectives include encouraging purchasing of larger sized units,

building trial among non-users and attracting switchers away from the competitors brands.

For trade promotions, objectives may include; including retailers to carry new items and

higher level of inventory, encouraging off-seasonal buying, of-setting competitive

promotions, building brand loyalty of retailers and gaining entry into new retail outlets.

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The sales force promotions help in encouraging support of a new product or model,

encouraging more prospecting and stimulating off-seasonal sales. But most importantly, sales

promotion should be focused on consumer relationship building.

Sales Promotion Tools

Many tools can be used to accomplish sales promotion objectives. Descriptions of the main

promotional tools are as follows;

Consumer Promotion Tools

The main consumer promotion tools are as follows;

Samples:

They are offers of a trial amount of a product. It consists of inviting prospective

purchasers to try the product without cost or at a lower cost in the hope that they will buy

the product. Samples may be free or discounted.

Coupons:

Coupons are certificates that give buyers a saving when they purchase a specified

product. Coupons can be mailed, placed in advertisements or included with other

products.

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 Rebates:

Rebate is also known as cash refund offers. Rebates are offers to refund part of a

purchase price of a product to its customers who send a proof of purchase to the

manufactures. These are like coupons except that the price reduction occurs after the

purchase and not at the point of sale.

Price Packs:

Cents-off deals or price packs offer consumers savings by way of reducing prices that are
marked by the producer directly on the package.

Premiums:

These are the goods offered either free or at a low cost as an

incentive to buy a product. Premiums may be in-pack or on-pack (outside

the pack).

Prizes:

They are offers of chance to win something such as cash, trips or goods by luck or

through extra efforts. Contests of talent and sweepstakes or draws the most popular prize

offering promotions.

Tie-in Promotions:

Tie-in promotions involve two or more brands or companies that team up on coupons,

refunds or contests to increase their pulling powers.

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Cross Promotions:

Cross promotions involve using one brand to advertise non-competing brand.

Advertising Specialties:

These are useful articles imprinted with an advertisers name, given as gifts to consumers.

Patronage Rewards:

They are cash or other awards for the regular use of companys products or services.

They are values (in cash otherwise) that are proportional to ones patronage of a certain

vendor or a group of vendors. They aim at building brand loyalty.

Trade Promotion Tools

More money is spent by companies on trade promotion (58%) than on consumer promotions

(42%). The major trade promotion tools are as follows

Discounts:

It is also known as price-off or off-invoice or off-list. Discounts price cut off the list price

on a particular quantity purchased during a stated time.

Allowances:


They are the amount offered in return for an agreement by the retailer to feature the

manufacturers products in some way display, advertising or otherwise.

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 Free Goods:

Free goods are the extra merchandise offered to middlemen who buy a specific amount of

a product.

ADVANTAGES AND DISADVANTAGES OF PROMOTION

ADVANTAGES:

1. It stimulates in the consumers an attitude towards the product.

2. It creates a better incentive in the consumers to make a purchase. It is a Demand

creator.

3. It gives direct inducement to the consumer to take immediate action.

4. It is flexible. It can be used at any stage of a new product introduction.

5. Sales promotion leads to low unit-cost, due to large-scale production and large

scale selling.

6. It is an effective supporter of sales. It helps the salesman and makes his effort

more productive.

7. The promotional tools are the most effective to be used in increasing the sales

volume.

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DISADVANTAGES:

1. Sales promotions are only supplementary devices to supplement selling efforts

of other promotion tools.

2. Sales promotion activities are having temporary and short life. The benefits

are also short-lived for three or four months. Then the demand will fall down.

3. They are non-recurring in their use.

4. Brand image is affected by too many sales promotion activities. Consumers

are of the opinion that due to the lack of popularity and overstocking of

products of a company, these sales promotional activities are conducted.

5. There is a feeling in the minds of the customers that sales promotional activity

tools are used to sell inadequate or second grade products.

6. Discounts or rebates are allowed by boosting the prices of the goods, with a

view to sell at a gain, which is not real.

7. Immediate increase in demand is stimulated by this. Hence it is a short-lived

tool.
8. It is expensive and leads to a rise in the price of products.

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