An Empirical Analysis of the Impact of Promotional Discounts on Store Performance

• Published in: Journal of retailing Vol. 93; no. 3; pp. 283 - 303
• Main Authors: Gauri, Dinesh K., Ratchford, Brian, Pancras, Joseph, Talukdar, Debabrata
• Format: Journal Article
• Language: English
• Published: Greenwich Elsevier Inc 01.09.2017; Elsevier Limited
• Subjects: Discounts; Financial performance; Loss leader; Profits; Promotional discounts; Retail stores; Sales promotions; Store flyers; Store performance; Promotional discounts; Store performance; Store flyers; Loss leader
• ISSN: 0022-4359; 1873-3271
• DOI: 10.1016/j.jretai.2017.06.001

[Display omitted] •Empirical study of the impact of price promotions on different measures of store performance.•Lend credence to the continued popularity of promotional discounts by retailers.•Feature discounts for high penetration, high frequency items drive store traffic.•Promotions of branded items are found to be more effective than on unbranded items.•Discounting on more items in a category appears to decrease store margins. The received wisdom, reflected in popular marketing textbooks, is that featuring deeply discounted items will generate additional store traffic for retailers that in turn will lead to increased sales and profits. However, there is surprisingly little systematic evidence about the impact of these deep discounts on aggregate store traffic, sales, and profits. In this paper, we study the effects of promotional discounts and their characteristics on various store performance metrics employing a store level dataset pooled over 55 weeks and 24 stores. Many findings of our study lend credence to the continued popularity of such promotions by retailers. We find that feature promotions build store traffic, especially when the categories being featured are high penetration, high frequency. Also, promotions of branded items are found to be more effective than promotions of unbranded items. Discounting on more items in a category leads to lower store margins suggesting that the cost of discounting a large proportion of items in a category may not be justified by the profits generated by the sale. Using the coefficients from our model estimates, various counterfactuals provide insights into strategic change in level of discounts across categories. We discuss several implications of our findings for retailers.