Suboptimality of Sales Promotions and Improvement Through Channel Coordination

Berend Wierenga and Han Soethoudt

ERIM Report Series Research in Management from 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

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.

Keywords: Sales promotions; channel coordination; channels of distribution; consumer price discounts (search for similar items in EconPapers)
JEL-codes: C44 M M31 (search for similar items in EconPapers)
Date: 2002-01-24
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