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

  • 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)

Registered author(s):

    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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    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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    1. Peter S. Fader & James M. Lattin, 1993. "Accounting for Heterogeneity and Nonstationarity in a Cross-Sectional Model of Consumer Purchase Behavior," Marketing Science, INFORMS, vol. 12(3), pages 304-317.
    2. Aradhna Krishna & Z. John Zhang, 1999. "Short- or Long-Duration Coupons: The Effect of the Expiration Date on the Profitability of Coupon Promotions," Management Science, INFORMS, vol. 45(8), pages 1041-1056, August.
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    4. Kapil Bawa, 1990. "Modeling Inertia and Variety Seeking Tendencies in Brand Choice Behavior," Marketing Science, INFORMS, vol. 9(3), pages 263-278.
    5. Sanjay K. Dhar & Donald G. Morrison & Jagmohan S. Raju, 1996. "The Effect of Package Coupons on Brand Choice: An Epilogue on Profits," Marketing Science, INFORMS, vol. 15(2), pages 192-203.
    6. Jagmohan S. Raju & Sanjay K. Dhar & Donald G. Morrison, 1994. "The Effect of Package Coupons on Brand Choice," Marketing Science, INFORMS, vol. 13(2), pages 145-164.
    7. Abel P. Jeuland, 1979. "Brand Choice Inertia as One Aspect of the Notion of Brand Loyalty," Management Science, INFORMS, vol. 25(7), pages 671-682, July.
    8. Moshe Givon, 1984. "Variety Seeking Through Brand Switching," Marketing Science, INFORMS, vol. 3(1), pages 1-22.
    9. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
    10. Barbara E. Kahn & Jagmohan S. Raju, 1991. "Effects of Price Promotions on Variety-Seeking and Reinforcement Behavior," Marketing Science, INFORMS, vol. 10(4), pages 316-337.
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