A Theory of Consumer Promotions: Managerial Implications

Manufacturers are not necessarily in the "prisoner's dilemma" with their promotional spending. A small share brand may be made better off by promoting even if its behavior triggers a promotional response from larger share conpetitors. Given the seeming inevitability of promotional activity, we consider the management of promotional expenditures across a product line. A manufacturer with two brands, B, and B2 (where B^ ' s market share is larger than B2's), should make its decision whether to promote B , B„ or both on the basis of the ratio of the promoted to unpromoted profit per unit. If that ratio is very small (a large percentage of the profit per unit is sacrificed in order to promote the product), only B (the smaller share brand) should be promoted. For higher ratios of promoted to unpromoted profit, the manufactuer should promote only B, (the larger share brand). When the ratio of promoted to unpromoted profit is very high (almost no profit per unit is sacrificed in order to promote the product) both B, and Bshould be promoted. Since continuous promotion ceases to be effective the manufacturer is also faced with the problem of sequencing its brand's promotions. For many product classes, the level of competitive promotional activity varies across time. A manufacturer whose brands are large relative to competitive promotional activity should promote its stronger brand in the season of heaviest competitive promotional activity. A manufacturer whose brands are small relative to competitive promotional activity should concede the heavy promotional season and promote its stronger brand in the season with lower competitive promotional activity. A THEORY OF CONSUMER PROMOTIONS: MANAGERIAL IMPLICATIONS Promotion expenditures have grown dramatically in recent years, reaching an estimated ^60 billion in 1982. Industry reactions to this trend are 2 mixed. Hertz chair, Olson, finds such expenditures counter profitable. 3 7-Up's chair. Winter, finds them essential and productive. Bystanders attribute the confused spending in part, at least, to the management of promotion dollars. An Ad Age article titled "Room at the Top in Promotions," suggest that promotion management has remained clerical despite the fact that promotion expenditures have grown from 5% to 60% of a typical marketing budget. In "Sales Promotion Fast Growth, Faulty Management," Strang (1976) suggests that promotion expenditures have been used by brand managers to optimize their career paths rather than their firms* profits. In this paper we will explore the popular myth which suggests that promotional spending is inherently irrational since it places manufacturers in a situation analogous to the "prisoner's dilemma." We then develop rules of thumb that a profit maximizing manufacturer can use to allocate promotional dollars across products in a line and to sequence promotions through time. We begin by reviewing existing literature that concerns itself with promotion management.