Asymmetric Promotion Effects and Brand Positioning

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 Φ. 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 Φ. 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 asymmetries. 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 trade-off 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.