Promotion Effect Simulation

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立 政 治 大 學

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The preference for smaller pack in PX shoppers is contradictory to actual practice because pack size sold in PX channel is larger than in CVS, and designed for family use because most of the shoppers in PX Mart are people who buy for household consumption. One possible explanation is, respondents have a preference for lower unit price, not pack size. When promotion in trade is available, they will tend to buy more to get more discount.

Based on the assumption and previous results, a simulation scenario is conducted to validate if promotions can change consumers’ basket size.

4.4. Promotion Effect Simulation

Simulations were conducted for CVS and PX shoppers respectively to validate if below hypotheses are true in each channel.

H0: Promotion mechanism can induce consumers to buy more

Based on the data for PX shoppers, a simulation is conducted with Sawtooth Software to simulate shoppers’ preferences for different combinations of pack sizes and promotion mechanisms. Each combination is given a preference score which in total adds up to 100. By ranking the scores from highest to lowest, simulation results are as below:

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Table 9 PX shopper promotion preference simulation

In PX shopper data analysis, there was no preference on promotion mechanism, only preference for SP old spec was significant. However, in simulation above, we can see

promotion mechanism plays a higher weight on preference ranking than pack size. Buy 2 get 1 free for SP old spec ($22 @ 50g), SP new spec ($25 @ 60g), and TB old spec ($39 @ 95g) ranked Top 3 on respondents’ preference level, while one for 10% off for SP old spec and SP new spec only ranked fourth and fifth on preference.

Then I calculated shoppers’ spending and expenses saved for all options and get results as

Rescaling Method: Zero-Centered Diffs Total

One for 10% -11.98

Buy 2 for 20% -27.87

Buy 2 get 1 free 39.85

TB new spec ($45/108g) -85.95

TB old spec ($39/95g) -2.26

SP new spec ($25/60g) 41.89

SP old spec ($22/55g) 46.32

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Table 10 PX Shopper Preference Analysis

We can see in combination with promotion mechanism, when higher discount depth is offered, consumers tend to enlarge their basket size in order to save more money. Buy 2 get 1 free ranked Top 3 even in combination with Tall Box old spec. From the result, we can infer consumers actually prefer the lower unit price, not the small pack size. PX shoppers have higher incentive to buy more and get more discounts because they have higher demand for saving, stocking at higher level also give them less pressure because they have more family members to share.

However, shoppers still have a price tier limit for each product. When the unit price exceeds the limit one is willing to pay, the promotion effect to off-set the negative impact on sales becomes less. We can see Buy 2 get 1 free on Tall box old price ($45/108g) ranked only the 10^th among the total 12 options, although it provides the highest saving($45) above all other options. When the unit price and expense exceed the limit customers are willing to pay, promotion effects will not totally off-set the negative impact of price increase, and the effect has a negative relation with the price increase percentage.

4.4.1. Simulation for CVS shoppers

Even though there were no significant preference for either promotion mechanism or pack size, simulation for promotion mixes are still conducted for CVS shopper data, and the results are as below:

NO# Promotion Pack Size Preference gram

purchased

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Table 11 CVS Shopper Promotion Preference Simulation

Contrary to PX shopper simulation result, Buy 2 get 1 free becomes the most unfavorable promotion mechanism for CVS shoppers, while Buy 2 get 20% off becomes the most favorable promotion mechanism. Preferences for pack size is similar to PX shoppers, SP small pack is still the most favorable pack, and the preference ranking has a negative relation with increase of pack volume.

Then I also added gram purchased, expense saved, and price per gram to get a better picture on the analysis. Details are as below:

Rescaling Method: Zero-Centered Diffs

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Table 12 CVS Shopper Preference Analysis

From the results above, we can see Buy 2 for 20% off in combination with SP old and new spec, Buy 1 for 10% off with SP old and new spec ranked Top 4, even though options ranked No. 3 and No.4 saved only $2.2 and $2.5 respectively. Option ranked No. 5 saved $15.6, which is more than 6 times saving than No. 3 and No. 4. From the financial perspective, the preference ranking isn’t a rational choice at all. However, if we consider that CVS shoppers mostly buy for immediate consumption, and have a smaller basket size, then it is reasonable to infer CVS shoppers will choose a smaller purchase volume rather than saving on deals.

NO# Promotion Pack Size Preference Gram

purchased

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5.1. Manufacturers should nibble, not bite

Company B adjusted the potato chip price per gram in all channels to be the same. This resulted in 15% price increase in PX Mart, which is a drastic move to the consumers. In order to off-set the negative impression, the company also increased the pack volume in an attempt to dilute the price up impact, but the initiative wasn’t successful.

For potato chips, consumers have higher sensitivity for unit price than pack volume. This means shoppers are more perceptive of the unit price increase and may not appreciate pack volume increases. The tendency to avoid loss in human psychology might drive shoppers to switch their purchase decision to other brands. Moreover, potato chips are considered as unhealthy food and people have a concern to consume too much potato chips. Bigger pack size, also with higher unit price, isn’t necessarily a favorable choice for consumers. As a result, managers should avoid drastic increase in the unit price. Instead, they could increase price per gram, but launch smaller packs or decrease pack volume and maintain same unit price, to make the price up less noticeable to consumers.

5.2. Utilize discriminative pricing for different pack sizes

In Company B’s price up project, the manufacturer tried to adjust the discriminative pricing between channels to equal level. However, it led to sharp increase ratio in channels with EDLP pricing strategy like PX Mart. The sales decline ratio is too high and cannot be