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Suboptimality of Sales Promotions and Improvement Through Channel Coordination

Author

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  • Wierenga, B.
  • Soethoudt, H.

Abstract

This paper deals with sales promotions in the form of consumer price discounts in fast-moving consumer goods. First, we show analytically that suboptimality is to be expected with respect to the size of the consumer price discount. This is due to the separate decision making of the retailer and the manufacturer. We then compute the impact of this suboptimality for a database of eighty-six sale promotions, and we find that it is substantial. On average, the actual profitability of the sales promotions is only about one fourth of its potential profitability. The suboptimality problem can be solved through specific arrangements between retailer and manufacturer, which have the purpose of better channel coordination. One of these is a proportional discount sharing arrangement, in which each party contributes to the consumer price discount in proportion to its original margin (without sales promotion). Several other winwin arrangements are possible also.

Suggested Citation

  • Wierenga, B. & Soethoudt, H., 2002. "Suboptimality of Sales Promotions and Improvement Through Channel Coordination," ERIM Report Series Research in Management ERS-2002-10MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    • Handle: RePEc:ems:eureri:157
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    References listed on IDEAS

    as
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    4. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
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    More about this item

    Keywords

    Sales promotions; channel coordination; channels of distribution; consumer price discounts;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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