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The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications

Publication ,  Journal Article
Kopalle, PK; Mela, CF; Marsh, L
Published in: Marketing Science
August 1999

Baseline sales measure what retail sales would be in the absence of a promotion (Abraham and Lodish 1993), and models that measure baseline sales are widely used by managers to assess the profitability of promotions (Bucklin and Gupta 1999–this issue). Estimates of baseline sales and promotional response are typically independent of past promotional activity, even though there is evidence to suggest that increased discounting reduces off-promotion sales and increases the percentage of purchases made on deal (e.g., Krishna 1994). As a result, models that do not consider dynamic promotional effects can mislead managers to overpromote. Given the widespread use of “static” models to evaluate the efficacy of promotions, it is particularly desirable to calibrate a dynamic brand sales model and use it to establish an optimal course of action. Accordingly, we develop a descriptive dynamic brand sales model and use it to determine normative price promotion strategies. Our descriptive approach consists of estimating a varying-parameter sales response model. Letting model parameters vary with past discounting activity accommodates the possibility that market response changes with firms' discounting policies. In the normative model, we use the estimates obtained in the descriptive model to determine optimal retailer and manufacturer prices over time. The results of the descriptive model indicate that promotions have positive contemporaneous effects on sales accompanied by negative future effects on baseline sales. The results of the normative model suggest that the higher-share brands in our data tend to overpromote while the lower-share brands do not promote frequently enough. We project that the use of our model could improve manufacturers' profits by as much as 7% to 31%. More generally, the normative results indicate that i) if deals become more effective in the current period, i.e., if consumers are more price sensitive, promotions should be used more frequently; and ii) as the negative dynamic effect of discounts on sales increases, the optimal level of discounting should go down. Without our approach, it would be difficult to make this trade-off exact. Finally, we demonstrate that these dynamic effects provide another perspective to the marketing literature regarding the existence of promotions.

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Published In

Marketing Science

DOI

EISSN

1526-548X

ISSN

0732-2399

Publication Date

August 1999

Volume

18

Issue

3

Start / End Page

317 / 332

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Related Subject Headings

  • Marketing
  • 3506 Marketing
  • 1505 Marketing
 

Citation

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Kopalle, P. K., Mela, C. F., & Marsh, L. (1999). The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications. Marketing Science, 18(3), 317–332. https://doi.org/10.1287/mksc.18.3.317
Kopalle, Praveen K., Carl F. Mela, and Lawrence Marsh. “The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications.” Marketing Science 18, no. 3 (August 1999): 317–32. https://doi.org/10.1287/mksc.18.3.317.
Kopalle PK, Mela CF, Marsh L. The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications. Marketing Science. 1999 Aug;18(3):317–32.
Kopalle, Praveen K., et al. “The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications.” Marketing Science, vol. 18, no. 3, Institute for Operations Research and the Management Sciences (INFORMS), Aug. 1999, pp. 317–32. Crossref, doi:10.1287/mksc.18.3.317.
Kopalle PK, Mela CF, Marsh L. The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications. Marketing Science. Institute for Operations Research and the Management Sciences (INFORMS); 1999 Aug;18(3):317–332.

Published In

Marketing Science

DOI

EISSN

1526-548X

ISSN

0732-2399

Publication Date

August 1999

Volume

18

Issue

3

Start / End Page

317 / 332

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Related Subject Headings

  • Marketing
  • 3506 Marketing
  • 1505 Marketing