Explaining the Variation in Price and Promotion Sensitivities - It's More than Demographics

For over 20 years, researchers in marketing have investigated factors that influence price sensitivity. There is extensive variation in price and promotion sensitivities at all levels of aggregation. Recent empirical work, enabled by advances in data collection and statistical methodology, has advanced our understanding of variation in consumer response to price promotions. Such variation in part has been explained by variation in search costs, factors related to household production, and retailer price strategy. Theoretical work has indicated that switching behavior is a key element in any understanding of promotions. While promotions provide incentives for households to switch brands and stores (Arnold et al. 1983; Kumar and Leone 1988; Walters 1991), consumer switching provides incentives to brands and stores to offer promotions (Varian 1980; Narasimhan 1988; Raju, Srinivasan, and Lal 1990). The optimal promotional strategy of a retailer will depend on the relative magnitudes of price and promotional sensitivities (Kim and Staelin, 1999), which in part depend upon market level forces. Thus, in theory, a substantial portion of the variation in price and promotional sensitivities should be related to variation in market level competition. We simultaneously model price and promotional sensitivities as a function of demographic variables, brand competition, retail strategy, and market level competition factors. We find that these factors account for a large portion (>40%) of the extensive variation in sensitivities across retail accounts. Retail strategy accounts for from 1/4 to 1/3 of the explained variation in price sensitivities and 1/3 of the explained variation in display and feature sensitivities. Demographics account for 1/2 of the explained variation in display and feature sensitivities and around 1/3 of the explained variation in price sensitivities. While brand competition accounts for 1/3 of the variation in price sensitivities, it explains little of the variation in promotion sensitivities. Retail competition accounts for surprisingly little of the variation in price and promotion sensitivities.