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

Author

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  • 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)

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.

Suggested Citation

  • Z. John Zhang & Aradhna Krishna & Sanjay K. Dhar, 2000. "The Optimal Choice of Promotional Vehicles: Front-Loaded or Rear-Loaded Incentives?," Management Science, INFORMS, vol. 46(3), pages 348-362, March.
  • Handle: RePEc:inm:ormnsc:v:46:y:2000:i:3:p:348-362
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    File URL: http://dx.doi.org/10.1287/mnsc.46.3.348.12062
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Leenheer, J. & Bijmolt, T.H.A. & van Heerde, H.J. & Smidts, A., 2002. "Do Loyalty Programs Enhance Behavioral Loyalty : An Empirical Analysis Accounting for Program Design and Competitive Effects," Discussion Paper 2002-65, Tilburg University, Center for Economic Research.
    2. Alessandro Acquisti, 2014. "Inducing Customers to Try New Goods," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(2), pages 131-146, March.
    3. Marshall Freimer & Dan Horsky, 2008. "Try It, You Will Like It—Does Consumer Learning Lead to Competitive Price Promotions?," Marketing Science, INFORMS, vol. 27(5), pages 796-810, 09-10.
    4. Zhao, Li & Tian, Peng & Xiangyong Li, 2012. "Dynamic pricing in the presence of consumer inertia," Omega, Elsevier, vol. 40(2), pages 137-148, April.
    5. P. B. Seetharaman & Hai Che, 2009. "Price Competition in Markets with Consumer Variety Seeking," Marketing Science, INFORMS, vol. 28(3), pages 516-525, 05-06.
    6. 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.
    7. S. Sajeesh & Jagmohan S. Raju, 2010. "Positioning and Pricing in a Variety Seeking Market," Management Science, INFORMS, pages 949-961.
    8. Chiu, Chun-Hung & Choi, Tsan-Ming & Hao, Gang & Li, Xun, 2015. "Innovative menu of contracts for coordinating a supply chain with multiple mean-variance retailers," European Journal of Operational Research, Elsevier, vol. 246(3), pages 815-826.
    9. repec:spr:infosf:v:13:y:2011:i:5:d:10.1007_s10796-010-9247-z is not listed on IDEAS
    10. Qiang Lu & Sridhar Moorthy, 2007. "Coupons Versus Rebates," Marketing Science, INFORMS, vol. 26(1), pages 67-82, 01-02.
    11. Smith, Andrew & Sparks, Leigh, 2009. ""It's nice to get a wee treat if you've had a bad week": Consumer motivations in retail loyalty scheme points redemption," Journal of Business Research, Elsevier, vol. 62(5), pages 542-547, May.
    12. Aradhna Krishna & Uday Rajan, 2009. "Cause Marketing: Spillover Effects of Cause-Related Products in a Product Portfolio," Management Science, INFORMS, pages 1469-1485.
    13. Terry A. Taylor, 2002. "Supply Chain Coordination Under Channel Rebates with Sales Effort Effects," Management Science, INFORMS, pages 992-1007.

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