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

Z. John Zhang (), Aradhna Krishna () and Sanjay K. Dhar ()
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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

Management Science, 2000, vol. 46, issue 3, 348-362

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.

Keywords: sales promotions; coupons; loyalty programs; marketing mix; competetive strategy (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (34)

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