Several studies have shown that promotions of national brands
yield more effect than those of store brands (e.g., Allenby and Rossi 1991,
Blattberg and Wisniewski 1989). However, the evolution of price-quality data
available from Consumer Reports over the last 15 years seems to reveal
a reduction of the quality gap between store brands and national brands, while
price differences remain substantial. Simultaneously, the share of private label
brands has increased (Progressive Grocer 1994). In this context, we study
whether we can maintain a view of the world where national brands may easily
attract consumers from store brands through promotions, whereas store brands
are relatively ineffective in attracting consumers from national brands by such
means.
We analyze consumer reactions to price discounts in a parsimonious
preference model featuring loss aversion and reference-dependence along dimensions
of price and quality (Hardie, Johnson, and Fader 1993, Tversky and Kahneman
1991). The key result of our analysis is that, given any two brands, there is
an asymmetric promotion effect in favor of the higher quality/higher price brands
if and only if the quality gap between the brands is sufficiently large in comparison
with the price gap. Thus, the direction of promotion asymmetry is not unconditional.
It depends uniquely on the value of the ratio of quality and price differences
compared to a category specific criterion, which we call I. If the ratio of
quality and price differences is larger than this criterion, the usual asymmetry
prevails; if such is not the case, the lower quality/lower price brands promote
more effectively.
More precisely, our model predicts that cross promotion effects
depend on two components of brand positioning in the price/quality quadrant.
First, we define a variable termed "positioning advantage" that indicates
whether, relative to the standards achieved by another brand, a given brand
is underpriced (positive advantage) or overpriced (negative advantage). Promotion
effectiveness is increasing in this variable. Second, cross promotion effects
between two brands depend on their distance in the price/quality quadrant. This
variable impacts promotion effectiveness negatively and symmetrically for any
pair of brands. "Positioning advantage" and "brand distance"
are orthogonal components of brand positioning, irrespective of the degree of
correlation between available price and quality levels in the market.
Empirically, we investigate the role of brand positioning in
explaining cross promotion effects using panel data from the chilled orange
juice and peanut butter categories. We compute the independent positioning variables,
"positioning advantage" and "brand distance," from readily
available data on price and quality positioning after obtaining our estimates
of I. We next measure promotion effectiveness by estimating choice share changes
in response to a price discount, using a choice model that does not contain
any information about quality/price ratios. Finally, we test the relation between
the two positioning variables and the promotion effectiveness measures.
The data reveal that in the orange juice category lower quality/lower
price brands generally promote more effectively than higher quality/higher price
brands. In the peanut butter data the opposite asymmetry holds. In both cases,
inter-brand promotion patterns are well explained by the positioning variables.
An attractive feature of our model is that, in addition to the direction of
promotion asymmetries, it also explains the extent of those asymmetrics.
A further interesting aspect of this approach is that we go
beyond a categorization of brands into price tiers. For instance, lower tier
brands in our data may promote more effectively than one national brand but
less effectively than another. Consistent with our theoretical predictions,
the data presented here seem to confirm that such cases occur because the lower
tier brand offers a favorable trade-off of price and quality differences compared
with one national brand and a less favorable tradeoff compared with the other.
The content of this paper is potentially relevant for brand
managers or retailers concerned with predicting the impact of their promotions.
The paper is of particular interest to marketing scientists who study the performance
of store brands versus national brands and may also appeal to those who wish
to explore the marketing implications of behavioral decision theory.
Finally, our investigation does not reject Blattberg and Wisniewski’s
(1989) finding, shared by Allenby and Rossi (1991) and Hardie, Johnson, and
Fader (1993), that national brands have a principle advantage in promotion effectiveness.
Rather, it formalizes when this principle advantage is overruled by positioning
disadvantages of such brands.
(Promotion; Brand Choice; Brand Positioning; Loss Aversion;
Reference-dependence)
