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The Optimal Choice of Promotional Vehicles: Front-Loaded or Rear-Loaded Incentives?

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Author Info

  • Z. John Zhang

    ()
    (Graduate School of Business, Columbia University, 513 Uris Hall, New York, New York 10027)

  • Aradhna Krishna

    ()
    (University of Michigan Business School, 701 Tappan Street, Ann Arbor, Michigan 48109-1234)

  • Sanjay K. Dhar

    ()
    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

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    Abstract

    We examine the key factors that influence a firm's decision whether to use front-loaded or rear-loaded incentives. When using price packs, direct mail coupons, FSI coupons or peel-off coupons, consumers obtain an immediate benefit upon purchase or a front-loaded incentive. However, when buying products with in-pack coupons or products affiliated with loyalty programs, promotion incentives are obtained on the next purchase occasion or later, i.e., a rear-loaded incentive. Our analysis shows that the innate choice process of consumers in a market (variety-seeking or inertia) is an important determinant of the relative impact of front-loaded and rear-loaded promotions. While in both variety-seeking and inertial markets, the sales impact and the sales on discount are higher for front-loaded promotions than for rear-loaded promotions, from a profitability perspective, rear-loaded promotions may be better than front-loaded promotions. We show that in markets with high variety-seeking it is more profitable for a firm to rear-load, and in markets with high inertia it is more profitable to front-load. Model implications are verified using two empirical studies: (a) a longitudinal experiment (simulating markets with variety-seeking consumers and inertial consumers) and (b) market data on promotion usage. The data in both studies are consistent with the model predictions.

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    File URL: http://dx.doi.org/10.1287/mnsc.46.3.348.12062
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 46 (2000)
    Issue (Month): 3 (March)
    Pages: 348-362

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    Handle: RePEc:inm:ormnsc:v:46:y:2000:i:3:p:348-362

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    Related research

    Keywords: sales promotions; coupons; loyalty programs; marketing mix; competetive strategy;

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    Cited by:
    1. Zhao, Li & Tian, Peng & Xiangyong Li, 2012. "Dynamic pricing in the presence of consumer inertia," Omega, Elsevier, vol. 40(2), pages 137-148, April.
    2. Agarwal, Manoj K. & Frambach, Ruud T., 2003. "Customized service bundles in a competitive context : integrating consumer's bundling, brand and quantity decisions," Serie Research Memoranda 0015, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    3. Alessandro Acquisti, 2014. "Inducing Customers to Try New Goods," Review of Industrial Organization, Springer, vol. 44(2), pages 131-146, March.
    4. Alina Filip, 2011. "Loyalty Programs. Role, Structure and Potential Benefits," International Journal of Economic Practices and Theories, Academy of Economic Studies - Bucharest, Romania, vol. 1(2), pages 88-93, September.

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