-A THEORY OF CONSlfMER PROMOTIONS: THE MODEL

Consumers who react to a promotional offer might switch from their preferred brand to the promoted brand, they might stockpile the promoted brand, or they might switch and stockpile. We model the implications of such consumer responses for a manufacturer's profit. Conditions under which a profit maximizing manufacturer should promote its product are then inferred from the aggregated response function. It is never profitable to promote to consumers who only stockpile in response to a promotion. A sufficient number of consumers must switch to the promoted brand to make promoting profitable. Stockpiling behavior on the part of those consumers v;ho switch to the promoted brand will, however, enhance profitability. The paradigm provides further insights which run counter to prevailing theory. Promotion is shown to be more likely to benefit small, rather than large, share brands. And v^e conjecture that there should not be a pronounced trough in market level sales following a promotional sales peak. A THEORY OF CONSUMER PROMOTIONS Sales promotion expeurlitures have grown dramatically in recent years. In 1969, promotional spending approximately equalled advertising spending. Since then, total promotional spending has gro\ra to i:60 billion and the promotion/advertising ratio has risen to 60/40 (See Figure 1).. [ FIGURE 1 ABOUT HERE ] Some industry sources find this trend alarming. Among them is Hertz Chairman Frank Olson, who claims that promotional gifts associated with car rentals "do nothing but increase the cost of doing business". Philip K. Fricke, a Goldman, Sachs and Co. auto stocks analyst, sees a similar futility in new car rebates. Fricke proposes that "the auto industry's on-again, off-again pattern of rebates [has not stimulated the desired Industry upturn. Instead it]... has conditioned the consumer to wait — almost indefinitely — ..2 for some giveaway." Robert G. Bro\vTi, president of SPAR, holds a more moderate opinion. He suggests that promotions can be profitable but warns of the "trade promotions trap." He claims that "a promotion forced [sales] increment this year often undermines next year's performance and even the long term viability of the