A. Buying behavior
Consumer decision making varies with the type of buying decision. The decision to buy toothpaste, a tennis racket, a personal computer, and a new car are all very different.
Blackwell, Miniard, and Engel (2001) mention that individual characteristics and purchase characteristics are the evaluative criteria in purchase decision process. These determinants of purchase characteristics are type of product, timing variables, price/quality, and situation. And there are many events showing consumer’s involvement is not high among frequently purchasing product. In this study, FMCGs are products that have a quick shelf, at relatively low cost, and do not require a lot of thought, time and financial investment to purchase.
FMCG also refers to wide range of frequently purchased consumer products. Generally speaking, customers are most price-sensitive to products that cost a lot or are bought frequently. They are less price-sensitive to low-cost items or items they buy infrequently.
They are also less price-sensitive when price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime. Companies, of course, prefer to work with customers who are less price-sensitive. Tom Nagle offers a list of factors associated with lower price sensitivity, for instance, buyers are less aware of substitutes and the product is assumed to have more quality, prestige, or exclusiveness. We assume that price/quality is the important purchase variable among FMCG in this study.
We group buyers into price sensitivity, low price sensitivity and others. In this study, we are interesting in price sensitivity and low price sensitive buyers. For price sensitive buyers, the price is only what they care. For example, they would like to buy the cheapest product or pay a lot of attention to what is on promoted. They scrimp on purchasing. But for low price sensitive buyers, they are loyalty to specific brand or pay attention to high quality products that always associate with high price. However, the past studies do not take notice of product pricing. Companies need to understand the price sensitivity of their customers and prospect and the trade-offs people are willing to make between price and product characteristics.
As we know, the complementary purchase of technical products is common. For example, while buying a digital camera, we will purchase a memory card which is use
spaghetti sauce) and do not prove whether price sensitive buyers purchase complementary or not. We will extend the study of promotional effects to FMCG category and, more importantly, to be empirical work on different price level of substitution and complementary products to advance promotional and merchandising practice.
In this article, we did not use questionnaire but scanner data. The reasons is that scanner data is easy to acquire, can give practitioners better tools for understanding their markets, and purchase intension is still different from purchase behavior which accords with actual situation.
B. Price promotion
The retail price promotions affect sales of non-promoted products and competitor performance is critical to retailers as they attempt to increase the effectiveness of promotion and improve their competitive position in the marketplace (Progressive Grocer 1989).
Kumar & Leone (1988) mention for manufacturers and retailers, they all expect to increase their sales. The manufacturer’s primary objective in promoting a brand is to increase sales. In contrast, the retailer’s primary objective is to maximize store profit. A retailer’s promotional strategy could affect sales by causing category switching, increased consumption, stockpiling, brand substation, and/or store substitution. Retail promotion enables both retailer and manufacturer to meet objectives when brand substitution occurs within the store and customers from other stores switch, or cross-shop, to take advantage of the promotion.
Gupta’s (1988) finding that the increasing sales on the promotion period are resulted from brand switching, purchase time acceleration and stockpiling. The important of brand choice is that brand switching accounts for 84% of the overall sales increase due to promotions in the coffee category.
Bell et al.(1999) work on Gupta’s study and generalize two effects that are secondary demand effect( brand switching effect) and primary demand expansion. Their finding is also support that secondary demand effect accounts for 75% of the overall sales increase due to promotions.
The success of retail price promotions depends on such factors as the ability of the promoted items to draw customers to the store, the profit (or loss) on the promoted item, the cannibalization that occurs when consumers switch away from regular-priced items to promoted items, and the boost in sales volumes of non-promoted items.
C. Brand substitute
Treating brands within a product category as substitutes is also consistent with the economic definition of substitutes proposed by Henderson and Quandt (1958): “…two commodities are substitutes if both can satisfy the same need.” From economist perspective, the relationship between substitution and complementary is about the change of relative price.
Classic examples of substitute goods include margarine and butter, or petroleum and natural gas (used for heating or electricity). The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so. Thus, an increase in price for one kind of good (ceteris paribus) will result in an increase in demand for its substitute goods, and a decrease in price (ceteris paribus, again) will result in a decrease in demand for its substitutes. Thus, economists can predict that a spike in the cost of wood will likely mean increased business for bricklayers, or that falling cellular phone rates will mean a fall-off in business for public pay phones.
In other words, good substitution is an economic concept where two goods are of comparable value. Car brands are an example. While someone could argue that Ford trucks are much different from Toyota trucks, If the price of Ford trucks goes up enough, some people will buy Toyota trucks instead.
In brand substitution area of researches, it is starting with Frank and Massy’s (1967) work. And Moriarty (1985) examined the brand substitution effects of retail promotions and found some evidence that promotions enhance substitution.
Kumar and Leone (1988) use store-level scanner data and investigate the effect of retail store price promotion, featuring, and displays on sales of brands of disposable diapers within a city. Featuring refers to the retailer advertising the brand at a specific price in a weekly store circular. Displayed refers to the retailer providing a specific in-store presentation of the product, either through in-aisle or end-of-aisle displays. Price-cut refers to the retailer reducing the price of the product in comparison to its regular everyday price. Within a store,
price promotion produced the largest amount of brand substitution, followed by featuring and displays. They all indicate that price promotion is positively associated with one brand’s sales.
But little empirical research has been done on complementary effects of promotions.
Walters (1991) indicates the presence of substitution effects within a product category and supports conventional wisdom (Davidson, Sweeney, and Stampfl). His study showing that substitution effects are asymmetrical and the brands with high market shares often gain sales at the expense of their low share competitors.
D. Complement
Balderson (1956) describes two types of complementary relationship. Products are use complements if they are consumed together; products are purchase complements if they are purchased together. From a retail perspective, the purchase complementary of all items included in a consumer’s shopping basket.
Product complements are products that are used in conjunction with one another to satisfy some particular need (Henderson and Quandt 1958). Complement or complementary good is defined in economics as a good that should be consumed with another good; its cross elasticity of demand is negative. This means that, if goods A and B were complements, more of good A being bought would result in more of good B also being bought. An example of complement goods is hamburgers and hamburger buns. If the price of hamburgers falls, more hamburger buns would be sold because the two are usually used together.
In marketing, complementary goods give additional market power to the company. It allows vendor lock-in as it increases the switching cost. A few types of pricing strategy exist for complementary good and its base good: Pricing the base good at a relatively low price to the complementary good - this approach allows easy entry by consumers (e.g. consumer printer vs ink jet cartridge). Pricing the base good at a relatively high price to the complementary good - this approach creates a barrier to entry and exit (e.g. golf club membership vs green fees)
A basic notion in retailing is that promotions also affect consumer purchasing patterns by stimulating purchases of non-promoted complements to the promoted products (Berman and Evans 1989; Walters 1988). Promotions also can cause consumers to substitute a reduced-margin brand for a full-margin brand. Complementary effects created by promotions are of special interest to retailers because significant increase in sales of full-margin complementary products can offset decreases in sales of full-margin substitute brands (Walters 1991). McAlister and Totten (1985) indicates that the level of interaction often is substantial and the promoted brand can influence significantly both competitive brands (decrease their sales) and complementary products (increase their sales). Mulhern (1989) and Walters (1991) also show the promotion of one product can stimulate sales of complement.
TABLE 1 Summary of Empirical Research on Price Promotion Effects
Price promotion effect on
Reason for effect Selected literature Demonstrated effect
A. Neslin, Henderson, and Quelch (1985) Blatterg Eppen, and Lieberman (1981)
B. McAlister and Struse (1988) Guadagni and little
Brand switching Blattberg and Wisniewski (1989) Guadagni and Little (1983) Mulhern (1989), Walters (1991)
Sales decrease
Nonpromoted category
substitutes Category switching None Sales decrease complements Purchase for join
consumption
Mulhern (1989) Walters (1988, 1991) Berman and Evans (1989) McAlister and Totten (1985)
I. Walters and MacKenzie (1988) Walters and Rinne(1986)
II. Mulhern and Leone (1990) III. Lewison and