Anda di halaman 1dari 20

Journal of Econometrics 89 (1999) 249—268

Varying parameter models to accommodate dynamic


promotion effects
Eijte W. Foekens *, Peter S.H. Leeflang , Dick R. Wittink 
Department of Marketing and Marketing Research, Faculty of Economics, University of Groningen,
PO Box 800, 9700 AV Groningen, Netherlands
 Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853-4201, USA

Abstract

The purpose of this paper is to examine the dynamic effects of sales promotions. We
create dynamic brand sales models (for weekly store-level scanner data) by relating store
intercepts and a brand’s own price elasticity to a measure of the cumulated previous price
discounts — amount and time — for that brand as well as for other brands. The brand’s
own non-price promotional response parameters are related to the time since the most
recent promotion for that brand as well as for other brands. We demonstrate that these
dynamic econometric models provide greater managerial relevance than static models
can.  1999 Elsevier Science S.A. All rights reserved.

JEL classification: C23

Keywords: Time series of cross-sections; Sales promotion models; Scanner data

1. Introduction

Sales promotions are widely used by manufacturers and retailers. There has
been an explosive growth in promotional expenditures in the USA and in many
West European countries during the last few decades. Promotional activities
such as temporary price discounts, feature advertising and displays of brands by
retailers tend to have immediate sales effects. A primary reason for such
promotions by retailers is the potential to increase store traffic. For example,

* Corresponding author. Fax: #31 75 631 30 30.


 See, e.g. (Foekens (1995), Chapter 3) and Leeflang and Van Raaij (1995).

0304-4076/99/$ — see front matter  1999 Elsevier Science S.A. All rights reserved.
PII: S 0 3 0 4 - 4 0 7 6 ( 9 8 ) 0 0 0 6 3 - 3
250 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

some consumers may decide which store to go to for grocery shopping in a given
week based on the brands advertised (featured) in the retailers’ weekly advertise-
ments. Manufacturers also hope to achieve positive incremental sales for their
brands.
The growth in promotional expenditures, along with technological develop-
ments in data collection (e.g. UPC scanning equipment), has contributed to
recent progress in the modeling of promotion effects on brand sales. The model
outcomes have increased marketing researchers’ knowledge about the impact of
promotions. A frequent criticism of econometric models of promotional effects
estimated with store sales data is that it is virtually impossible for the manufac-
turer to decompose the effects into relevant components: e.g. brand switching,
store switching, stockpiling and (temporarily) increased consumption. The clas-
sic paper about this decomposition is based on household panel data (Gupta,
1988). Yet, brand managers depend largely on sales effects estimated from data
aggregated across households (Bucklin and Gupta, 1996). In this paper we
enhance the knowledge about so-called intermediate-term effects by incorporat-
ing past promotion activities in the parameters that represent current promo-
tion effects, using store sales data.
It seems reasonable to propose that a given sales effect for a brand is
managerially most desirable if it comes from increased consumption. Brand
switching may or may not be an attractive sales effect, depending upon competi-
tive reactions to the promotions (Raju, 1992; Leeflang and Wittink, 1996) and
their cross-brand effects. And the effect due to consumer stockpiling is ephemer-
al if higher sales now result in lower sales later. Yet, stockpiling effects have been
difficult to document with data aggregated across households (Neslin and
Schneider Stone, 1996). One possible reason for this difficulty is the inadequacy
of model specifications. Therefore, we propose to expand models of promotional
effects estimated with store data, in order to gain more insight into the dynamic
effects of promotions on sales. The specification of these effects is motivated by
previous research results.
We test hypotheses about the nature of dynamic promotion effects. We create
dynamic models of promotional activities by relating (store) intercepts and
price-promotion parameters to both the size of recent price discounts and the
time since the previous discount. The non-price promotion parameters are
related to the time since the previous (price or non-price) promotion. These
relationships are incorporated in a varying parameter model. The calibrated
models are extensions of the SCAN*PRO model (Wittink et al., 1988) which has
been used in some two-thousand different commercial applications in North
America, Europe, and Asia. We use store-level scanner data for three brands of
a frequently purchased consumer food product sold in a metropolitan area in

 See for a survey, e.g. Blattberg and Neslin (1990, 1993).


E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 251

the USA. The data represent 52 weeks for each of 28 stores belonging to one
retail chain.
The paper is organized as follows. In Section 2 we discuss dynamic promotion
effects and briefly review the existing literature. The modified SCAN*PRO model is
described in Section 3, along with hypotheses. The estimation method is de-
scribed in Section 4. We present the varying parameter model estimates in
Section 5, and conclude with a discussion of the results. We also provide
implications for researchers and managers.

2. Dynamic promotion effects

We summarize the characteristics and results of six studies that have focused
on the effects of the magnitude and frequency of price promotions in Table 1.
These studies suggest that
(a) stockpiling is a positive function of the magnitude of a temporary price
discount;
(b) variability in category sales is a positive function of the magnitude of
a temporary price discount (suggesting higher stockpiling and/or con-
sumption);
(c) variability in category sales is a negative function of the frequency of price
discounts (suggesting lower stockpiling and/or consumption);
(d) the price discount effect is a negative function of the relative frequency of
promotions;
(e) the optimal purchase quantity for the consumer is a positive function of the
discount magnitude and the amount of time between temporary discounts.
We use these findings to argue in favor of dynamic parameters as follows.
A model of promotions estimated from store sales data has parameters that
reflect a multitude of factors that can explain a sales effect: e.g. brand switching,
stockpiling and an increase in consumption. The roles that these factors play at
a given time vary as a function of the magnitude of a recent price promotion and
the recency of price- and non-price promotions. For example, the opportunity
for households to stockpile units of a discounted brand increases with the
amount of time since a previous promotion. This opportunity also decreases
with the magnitude of a previous price discount. If households stockpile, then
unit sales occurring after the promotion of a brand has ended will be reduced.
However, models of promotional effects on brand sales often fail to show
significant ‘post-promotion’ dips in sales. The difficulty in isolating such nega-
tive effects has been attributed to a variety of factors (Blattberg and Neslin, 1990;
Neslin and Schneider Stone, 1996). One possible explanation is that previous
attempts have focused primarily on the use of simple lagged promotion vari-
ables. We propose that the post-promotion dip be accommodated by allowing
Table 1 252
Studies of the magnitude and frequency of price promotions

Study Level of demand Data Magnitude effect Frequency effect

Krishna (1991) Brand sales Empirical data from NA Brands with higher (perceived)
computer simulated discount frequency obtain a
shopping experiment smaller market share gain and
have a lower expected price
Krishna et al. (1991) Brand sales Consumer survey data Less stockup with smaller High discount frequency of
(in a supermarket) discounts (current effect) a preferred brand reduces
consumer response to discounts
on new brands or on less
preferred brands
Helsen and Schmittlein Category sales Simulated data Deeper expected discounts Consumers should stockpile
(1992) reduce current forward a promoted product more
buying intensively the lower the
incidence of discount
opportunities
Raju (1992) Category sales Scanner data (cross- Higher magnitude of Higher discount frequency leads
sectional) discount leads to greater to a lower variability in category
variability in category sales
sales (current effect)
Assunc7 a o and Meyer Category sales No empirical data. NA Effect of price on sales is
(1993) Outcome based on a decreasing function of the long-
normative relation run relative frequency of price
between purchasing discounts and the probability of
behavior and price consecutive price discounts
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Krishna (1994) Category sales Empirical data from Optimal purchase quantity Average quantity purchased on
computer simulated for the consumer increases discount should be larger when
shopping experiment with deal amount (current discounts are spaced further
effect) apart

NA"Not applicable.
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 253

own-brand promotion parameters as well as the store intercepts to vary. This is


in the spirit of work by Gatignon and Hanssens (1987) who argue that such
dynamic models are more useful than models in which parameter variation is
purely stochastic or depends only on time

3. Model specification

We use a dynamic version of the SCAN*PRO model of retail promotion effects


(Wittink et al., 1988). This model was originally developed to quantify the effects
of promotions carried out by retailers for individual brands. To maintain the
confidentiality of the data sources the promotion parameters had to be equal
across stores. Store intercepts are included to accommodate heterogeneity in
a brand’s unit sales under non-promoted conditions. The SCAN*PRO model is
multiplicative so that promotion effects are proportionally homogeneous (pro-
portional to each store’s intercept).
Let J be the number of brands, ¹ the number of weekly observations per
store, N and the total number of sample stores. We use the following dynamic
specification (for all stores belonging to a given chain) for brand k:

    
P FGI R  ( P FH I 
s "j d GI R “ k"JGI R “ GH R “ k"JGH R exp(u ) (1)
GI R GI R I R PM JGI R PM JHI GI R
GI R J H$I GH R J
where
S " unit sales (e.g. pounds) of brand k in store, i week t;
GI R
P " actual unit price of brand k in store i, week t;
GI R
PM " regular (non-promoted) unit price of brand k in store i, week t;
GI R
D " an indicator variable for promotion: l if brand k is promoted by store
JGI R
i in week t, and 0 otherwise, where l"1 denotes ‘feature ad only’,
l"2: ‘display only’, and l"3: ‘simultaneous use of feature and
display’;
j " store intercept for brand k in store i, week t;
GI R
d " (seasonal) weekly multiplier for brand k, week t;
I R
h " own (temporary discount) price elasticity for brand k, in store i, week t;
GI R
k " own multiplier for brand k for promotion l, in store i, week t;
JGI R
h " cross (temporary discount) price elasticity for brand j with respect to
HI
brand k ;
k " cross multiplier of promotion l for brand j with respect to brand k;
JHI
u " a disturbance term for brand k in store i, week t, where u &N(0,p).
GI R GI R I

 See, e.g. Smith et al. (1994).


 See, e.g. Parsons (1975).
254 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

If j "j , h "h , and k "k for all i,t, model (1) reduces to the static
GI R GI GI R I JGI R JI
SCAN*PRO model in which response parameters are assumed to be homogeneous
across stores and over time. Less constrained versions of the static model (e.g.
parameter heterogeneity across stores belonging to different chains) yield para-
meter estimates with high face validity and high forecast accuracy.
We emphasize that the price elasticities estimated with a model such as Eq. (1)
may not be comparable to a ‘standard’ price elasticity in microeconomics. There
are at least three reasons why the temporary price discount elasticity in Eq. (1)
may differ from a regular price elasticity:
(a) In many product categories regular price changes represent increases,
often due to inflation. The price elasticities in Eq. (1) are based on consumer
response to temporary price discounts.
(b) Changes in regular price often occur because of increases in raw material
costs and other factors in the production process. As a result, many brands
within a product category experience regular price increases at approximately
the same time. By contrast, temporary price discounts instituted by a retailer
often occur in response to a trade promotion allowance offered by the manufac-
turer of a brand. Even if manufacturers of competing brands offer allowances at
the same time, the retailer has no incentive to institute temporary price dis-
counts simultaneously for these brands.
(c) Perhaps most importantly, unlike regular price changes, temporary price
cuts induce consumers, depending upon the product, to temporarily stockpile
and/or temporarily increase consumption of the promoted item. This means
that temporary price discount elasticities should have higher (absolute) values
than regular price elasticities. And, if the opportunity to stockpile depends on
certain conditions (e.g. the recency of a previous promotion) it is inappropriate
to assume constant response parameters in Eq. (1).
One operational issue is the definition of the regular price. Within one year
a brand’s regular price in a store changes infrequently. Empirically, therefore,
the determination of this regular price is relatively straightforward: it is a
high value that occurs frequently for the brand in a given store, usually the
maximum value in such a data set of weekly observations. If there are two
different high values that both occur in consecutive weeks, we accommodate an
apparent change in the regular price. Hence, the regular price variable in Eq. (1)
has a time subscript.
We note that if the actual price equals the regular price, the price-index
variable in Eq. (1) takes the value 1. And in the absence of promotions for any of

 See Foekens et al. (1994).


 Our procedure is similar to the one used by companies such as ACNielsen.
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 255

the brands, j represents unit sales of brand k in store i, week t, at the (unstated)
GI R
regular price.
Eq. (1) assumes that only within-store variation should be used for the
estimation of temporary price discount, feature advertising and display para-
meters. Differences in promotions between stores occur as a result of differences
in store-level competition and in consumer promotion sensitivities. Time-series
variation in promotions within each store is exogenous because retailers pass
manufacturer allowances for promotions through based on expected effects on
store traffic and product category volume. The timing of such allowances is
difficult to predict for competitive (between-brand) reasons. And retailers have
no incentive to promote more than one brand from the same product category
at the same time. A similar argument applies to the magnitude of a temporary
price discount for a given brand.
The dynamic model expressed in Eq. (1) allows only the own-brand parameters
to vary across stores and weeks. The cross-effect parameters are constant because:
(a) in static models the cross-brand effects are much weaker than the own-
brand effects;
(b) cross-brand effects are less likely to reflect consumer stockpiling (a pri-
mary reason for the creation of dynamic effects).
We now introduce parameter process functions for the own-brand price elastic-
ity, for the own-brand promotion multipliers and for the store intercepts. For
convenience, we drop the subscript k from these functions, Eqs. (2)—(4) below.

3.1. Price-elasticity process function

We let the own-price elasticity depend on (amount and time of) previous
temporary price discounts for own and competing brands, and show expected
signs (discussed under hypotheses below) in parentheses below the parameters:
h "b #b Dsum #b CDsum #l (2)
G R   GR  G R G R
\ > >
where
Dsum " S gQ\(PM !P ) for own brand in store i,
G R Q G R\Q G R\Q
CDsum " ( S gQ\( PM !P ) for the competing brands in
G R H$I Q GH R\Q GH R\Q
store i,
g"a decline rate (0(g)1), to allow the effect of a previous discount
to depend on its recency,
u"number of weeks of history used for the computation of the
explanatory variables in Eqs. (2)—(4); the scalar is introduced to
limit the number of weeks of history,
l "a random disturbance term, where l &N(0,p );
G R G R J
b , b , b , g are unknown parameters.
  
256 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

In Eq. (2), own- and other-brand effects are separated. One reason is that
the own-price elasticity reflects the purchase behavior of ‘loyal’ consumers of the
brand. The stockpiling behavior of these loyal consumers depends on the
magnitude and timing of recent price promotions for the brand. The elasticity
also reflects the (temporary) switching from other brands that occurs in the
presence of temporary price cuts. If this price cut is sufficiently large, the
purchases by consumers who would otherwise buy another brand may also
accommodate some stockpiling. However, even though CDsum captures the
aggregation of price cuts for all other brands (for simplicity), we expect that
b (b .
 
We use a grid search procedure for the determination of g. If g"1, discounts
in the preceding u weeks are equally weighted.

3.2. Multiplier process function

The own-brand promotional multipliers in Eq. (1) reflect the effects of indi-
cator variables D on s . The variables allow feature and display activities to
JGI R GI R
affect unit sales of brand k in store i, week t. We allow the magnitudes of these
multipliers to depend on not only the time since the previous feature and/or
display activity but also on the time since the previous price promotion. The
arguments for separating the own- and other-brand effects in Eq. (3) are similar
to the reasons discussed for Eq. (2).
k "c ¹ime AJ C¹ime AJ exp(l ) (3)
JG R J G R G R JG R
> > >
where
¹ime "equals r if r )u, and u#1 otherwise, where r is the number of
G R   
weeks since the previous own-brand promotion in store i;
C¹ime "equals r if r )u, and u#1 otherwise, where r is the number of
G R  A 
weeks since the previous promotion of any competing brand in
store i;
l "a random disturbance term, where l &N(0,p ), l"1,2,3;
JG R JG R TJ
c ,c ,c are unknown parameters.
J J J
3.3. Store-intercept process function

The store intercepts j in Eq. (1) reflect unit sales of brand k in store i in the
GI R
absence of price and non-price promotions for all brands in the product
category. One could argue that the store intercept represents the unit sales of
brand k in store i by consumers who prefer k over other brands under non-
promoted conditions. If these consumers stockpile any of the brands in the
presence of promotions, then in periods following promotions, the intercept
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 257

should decrease. Therefore, the process function allows the intercept to depend
on the magnitude of the previous temporary price discounts and the time since
the last promotion both for own and other brands. One advantage of this
formulation is that the post-promotion dip, which has been difficult to find in
traditional models of sales, should be easier to manifest itself.
We use the following process function for the store intercepts:

j "a exp(a Dsum #a CDsum ) NP¹ime ? CNP¹ime ? exp(e )


G R G  G R  G R G R G R G R
> \ \ > >
(4)
where

NP¹ime "equals q if q )u, and u#1 otherwise, where q is the


G R   
number of weeks since the previous non-price own-brand
promotion in store i;
CNP¹ime "equals q if q )u, and u#1 otherwise, where q is the
GI R   
number of weeks since the previous non-price other-brand
promotion in store i;
e "a random disturbance term, where e &N(0,p);
G R G R C
and all other explanatory variables are as defined before; a are unknown
G
store-specific constants (i"1,2,N) and a ,2,a are unknown parameters. In
 
Eq. (4) a distinction is made between the effects of previous price and non-price
promotions. All arguments for this specification are analogous to those made for
Eqs. (2) and (3).

3.4. Hypotheses

The own-brand price parameter should be negative and the cross-brand price
parameters positive, based on standard economic theory. Extant research indi-
cates that higher discounts lead to higher purchase acceleration (Table 1), which
draws sales from the weeks following the promotion, unless consumption
increases correspondingly. Similarly, quantity acceleration leads to stockpiling
by consumers who buy at the normal time but purchase partly for future
consumption (Blattberg and Neslin, 1990, p. 192). Thus, we hypothesize that the
own-brand price elasticity will move toward zero, the larger the magnitudes of
previous price promotions for own brand (Dsum) and for other brands (CDsum).
This hypothesis, as well as the ones stated below, assumes that other parameters
are held constant.
The own-brand multipliers should be greater than one and the cross-brand
multipliers less than one. The greater the number of weeks since the most recent

 See Neslin and Schneider Stone (1996) and Van Heerde et al. (1997).
258 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

price or non-price promotion, the larger the own-brand multipliers are expected
to be. Also, we expect that the closer the cross-brand multipliers are to one, the
closer c in Eq. (3) is to zero.
J
The intercept value should be positive for each store. The unit volume for
brand k under non-promoted conditions (for all brands) represents purchases
for current and future consumption. Purchases for future consumption (beyond
the next regular shopping trip) should be rare in the absence of promotions.
However, the incidence of such purchases should increase with larger temporary
price discounts. Thus, the greater the magnitude of previous price promotions,
the smaller the current period’s intercept. Similarly, the shorter the time period
since the previous non-price promotion, the smaller the current intercept.
For the intercept process function we may also argue that the greater the part
of a brand’s unit volume accounted for by loyal consumers under non-promoted
conditions, the less the relevance of other-brand promotions. If the intercept
represents loyal consumers’ purchases only, we expect a "a "0. Similarly,
 
the smaller the cross-brand price elasticities, the closer b in Eq. (2) is to zero.

We note that the interpretation of the price elasticities and multipliers chan-
ges as the intercept changes. In the absence of changes in marketing instrument
parameters, a decrease in an intercept implies decreases in the absolute market-
ing effects (since the impact would be defined with regard to a smaller base). As
a result, the dynamic effects for the marketing instruments captured by the
process functions (2) and (3) are difficult to interpret if the intercept dynamics are
not taken into account. Depending on the extent to which variation in other
parameters occurs simultaneously, it is conceivable that signs in one or more
process functions are reversed from our expectations. The plausibility of the
empirical results will, therefore, have to be judged by the change in predicted
unit sales given specific changes in promotional conditions.

4. Estimation

By substituting Eqs. (2)—(4) in Eq. (1), we obtain a dynamic model that allows
for parameter heterogeneity across stores and over time. The model is estimated
by a generalized least squares procedure in the usual two-step way (see Judge
et al., 1985, pp. 798, 799). We assume that: (i) the error terms of the different
parameter process functions are uncorrelated; and (ii) there is no autocorrela-
tion in any error term.
There may be concern about the consistency of the store-intercept estimates
in a non-linear fixed-effects model. This issue is resolved if ¹ is increased while
the number of parameters is held constant. This would be feasible if the

 Details on the estimation can be obtained from the first author upon request.
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 259

weekly dummies capture seasonality that is the same in successive years, i.e.
d "d . Another solution is to let the constant part in the store-intercept
I R> I R
process function, a , vary between stores based on a measure of store size.
GI
A third solution may be found in the specification of a random-effects model.
Otherwise, this issue may require consideration of several complicating issues
such as the properties of the estimated error variance—covariance matrix and the
use of GLS estimators.

5. Empirical analysis

5.1. The data

We use store-level scanner data for three brands of a frequently purchased


consumer food product sold in a metropolitan area in the USA. The data
represent 52 weeks for each of 28 stores belonging to one retail chain. Tempor-
ary price cuts, displays and features are frequently used consumer promotions in
this product category. Manufacturer television advertising and couponing are
also used, but no data are available on these activities. The weekly indicator
variables in (1) serve in part as proxies for these missing variables (there is little
seasonality in purchases from the product category).
For the measurement of the explanatory variables in the process functions, we
use six weeks of history (u"6) on the previous promotional activities. Because
of the initialization of these variables we have 46 ("52!6) weekly store
observations for estimation.
Brand A is the most heavily promoted brand: it receives more promotions
than brands B and C together. Price discounts account for more than half of all
promotional activities for A. Brand B is the least promoted brand. Table 2 shows
the means and standard deviations of the magnitude and timing variables of the
parameter process functions. The large frequency of price discounts for A results
in relatively large mean values for Dsum for A (and CDsum for B and C). Brand
B has the lowest mean value for Dsum (on average a six-week cumulated
discount of $0.23), and the highest for CDsum ($1.14). Table 2 also shows that
A has a temporary price cut on average every 1.7 weeks (P¹ime). In addition,
some type of non-price promotion for A tends to occur every 1.5 weeks
(NP¹ime). The large standard deviations (relative to the means) suggest that
variation in the time between promotions for the brands is quite large.

5.2. Results

The optimal grid solutions for g for brands A, B and C are 0.67, 0.75 and 0.95
respectively. Thus, the full models (m1 below; see Table 3) with g(1 have a fit
260 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Table 2
Means and standard deviations of the promotional intensity variables (u"6)

Magnitude variables
Dsum CDsum
A B C A B C

Mean 0.68 0.23 0.46 0.69 1.14 0.89


Std.dev. 0.47 0.32 0.42 0.65 0.76 0.67
¹iming variables
P¹ime CP¹ime ¹ime C¹ime
A B C A B C A B C A B C

Mean 1.7 3.1 2.0 1.8 1.4 1.5 1.5 2.9 1.9 1.7 1.3 1.4
Std.dev. 2.8 3.3 2.6 2.6 2.9 2.9 2.9 3.1 2.6 2.6 3.3 3.1
NP¹ime CNP¹ime
A B C A B C

Mean 1.5 2.8 1.9 1.7 1.3 1.4


Std.dev. 2.8 3.1 2.6 2.7 3.3 3.2

Results are based on 46;28"1288 observations (with a decline rate g"1).

Table 3
Parameter restrictions for the alternative nested models

Varying store intercept Stable store intercept (a "a "a "a "0)
   
Model m1 Model m4
Varying price elasticities and multipliers Varying price elasticities and multipliers
Model m2a Model m2b Model m5a Model m5b
Varying price Stable price elasticities Varying price Stable price elasticities
elasticities stable varying multipliers elasticities stable varying multipliers
multipliers multipliers
c "c "0 b "b "0 c "c "0 b "b "0
J J   J J  
Model m3 Model m6 ("static SCAN*PRO)
Stable price elasticities and multipliers Stable price elasticities and multipliers
c "c "0 c "c "0
J J J J
b "b "0 b "b "0
   

that is better than the fit of the corresponding models with g"1, implying that
more recent price promotions have stronger effects.
For each brand we examine the incremental explanatory power of each of
the process functions using F-tests (see Table 3). Model m4, the stable store
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 261

intercept model with varying price elasticities and multipliers, is nested in the
full model m1 as are models m2a and m2b. Model m3 is nested in both m2a and
m2b, etc.We find that the best models for brands A, B and C are m2b, m5a and m3
respectively. The estimation results for these models, for the full models (m1)
and for the static models (m6) are shown in Table 4. For brand A two of the
process functions have significant explanatory power. Only the price parameter
can be assumed to be constant. By contrast, for brand B only the own-price
elasticity is dynamic, while for brand C only the process function for the store
intercept matters.
For the intercept of brand A, previous own-brand discounts matter while
other-brand discounts do not, consistent with our expectation. On the other
hand, the timing of previous non-price promotions by other brands do and by
own brand do not matter. For brand C, the timing effects of previous own- and
other-brand non-price promotions are about the same.
The price elasticity of brand B appears to be especially dependent on own-
brand previous discounts. This result also appears to be consistent with our
expectation. The other-brand discounts also have a significant effect on the price
elasticity, albeit with an unexpected sign (which may not be wrong if Dsum and
CDsum are related).
The multiplier dynamics for brand A show stronger effects for previous
promotions by other brands than for own brand (the latter having an unex-
pected sign). Clearly, this result is inconsistent with our expectation.
In general, it appears that both own- and other brands’ previous promotions
are sources of parameter dynamics. This suggests that brand loyalty is modest in
this product category. Importantly, for two brands we obtain intercept dynam-
ics that accommodate post-promotion sales dips.

5.3. Implications

To highlight differences in substantive consequences between the dynamic


and static models, we show in Table 5 the range of estimated values of the
multipliers and the store intercepts (for three stores) for brand A, based on model
m2b. There is substantial variability over time in the store intercepts, and over
time and across stores in these multipliers. Two of the ranges of estimated own
feature- and own feature-and-display multipliers include seemingly implausible
values (i.e.(1), although in one case this results from a non-significant para-
meter estimate. We reemphasize the point that the process functions produce
parameter variation with some dependencies that may be responsible for values
that are implausible in the static model.

 For detailed information see Foekens et al. (1996).


Table 4
Estimation results

Brand A Brand B Brand C

Model ( see Table 3) m6 ml m2b m6 ml m5a m6 ml m3


Estimation method OLS GLS GLS OLS GLS GLS OLS GLS GLS
Deal decline rate 0.67 0.67 0.75 0.75 0.95 0.95
Degrees of freedom 1206 1194 1196 1206 1194 1204 1206 1194 1202
R log-sales space 0.926 0.930 0.930 0.777 0.782 0.781 0.890 0.893 0.892
Predictor variables
Static part Price PI—A ⴚ2.96 ⴚ3.19 ⴚ3.15 0.26 0.27 0.27 0.54 0.48 0.46
PI—B 0.69 0.36 0.36 ⴚ2.42 ⴚ1.82 ⴚ1.98 1.34 1.32 1.20
PI—C 1.08 0.75 0.75 0.38 0.36 0.42 ⴚ3.21 ⴚ3.77 ⴚ3.42
Non-price promotions F—A 1.17 0.51 0.51 1.48 1.63 1.38 0.63 0.43 0.44
D—A 1.80 1.96 1.95 0.94 0.95 0.95 0.82 0.82 0.81
FD—A 1.75 0.81 0.82 1.34 1.49 1.28 0.54 0.37 0.38
F—B 0.38 0.20 0.21 1.39 1.10 0.89 0.72 0.48 0.51
D—B 0.91 0.78 0.78 1.54 1.75 1.54 0.96 0.97 0.95
FD—B 0.33 0.17 0.17 2.08 1.86 1.34 0.61 0.42 0.43
F—C 0.93 0.53 0.54 1.42 1.73 1.35 2.12 2.01 1.70
D—C 1.03 1.01 1.01 0.93 0.93 0.93 2.41 2.37 2.39
FD—C 0.93 0.53 0.54 1.26 1.54 1.22 3.22 2.00 2.58
Dynamic part Prince-parameter Dsum 0.02 2.86 2.14 0.96
process function
CDsum 0.08 ⴚ1.44 ⴚ1.22 !0.23
Multiplier process Time;F—own !0.03 !0.03 !0.02 !0.18
function
Time;D—own ⴚ0.22 ⴚ0.22 !0.18 0.01
Time;F D—own !0.02 !0.02 !0.17 0.09
CTime;F—own 0.40 0.40 !0.20 !0.68
CTime;D—own !0.04 !0.04 !0.11 0.03
CTime;FD—own 0.20 0.20 0.03 0.62
Store-intercept Dsum ⴚ0.52 ⴚ0.53 0.17 0.04 !0.05
process function
CDsum !0.17 !0.19 0.02 0.10 0.09
NPtime !0.02 !0.02 !0.5 0.15 0.15
CNtime 0.08 0.08 0.08 0.17 0.17

Bold figures are significant parameter estimates; underlined figures are significant estimates with unexpected sign.
PI—A"price-index for brand A; F—A"feature only brand A; D—A"display only brand A; FD—A"feature and display brand A; etc.
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 263

Table 5
Variability in promotional effects (models for brand A)

Static SCAN*PRO Dynamic model (g"0.67)

Elasticities
Own price A !2.96 !3.15
Cross price B 0.69 0.36
Cross price C 1.08 0.75
Multipliers
Own feature A 1.17 (0.49, 1.11)
Own display A 1.80 (1.17, 1.95)
Own feature and display A 1.76 (0.78, 1.20)
Cross feature B 0.38 0.21
Cross display B 0.91 0.78
Cross feature and display B 0.33 0.17
Cross feature C 0.93 0.54
Cross display C 1.03 1.01
Cross feature and display C 0.93 0.54
Store intercepts
Store 1 164 (96, 189)
Smallest store 57 (32, 72)
Largest store 791 (669, 805)

Figures are based on significant parameter estimates; for the dynamic model, parameter estimates
are claimed to be significant if the corresponding parameter process function intercept estimate is
significant.

For each of the three stores considered (store 1, smallest store, and largest
store), the static model store intercept estimates lie between the corresponding
lower and upper values of the dynamic model. Fig. 1 shows the fluctuations in
the store 1 intercept for brand A over time. These fluctuations stem from brand
A’s own previous price discounts and the recency of other-brand non-price
promotions. The dotted line represents the fixed effect of the static model. On
average, the store 1 intercept in the dynamic model is lower than the fixed effect.
The dynamic promotion effects also lead to changes in the estimated net
incremental sales due to promotions relative to the static model. We consider
one promotional scenario scheduled during weeks 7—17 under two alternative
histories for weeks 1—6. We show the predicted sales in store 1 for both the
dynamic (m2b) and the static (m6) versions of the model for brand A in Fig. 2.
In case 1 with no promotion in weeks 1—6, predicted unit sales in week 7 with
the static model equals 164 units. The subsequent predicted values (265 in both
weeks 9 and 11) show net incremental sales (NIS) for a total of 202 units. The

 Other scenarios are described in Foekens et al. (1996).


264 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Fig. 1. Graph of store 1 intercept for brand A (with a decline rate g"0.67)

dynamic model has a higher baseline in week 7 (196 units) and a smaller NIS
value of 184 units, or 91% of the estimated incremental sales from the static
model.
The difference between static and dynamic model predictions is more dra-
matic when the price discounts in weeks 9 and 11 occur after a substantial
amount of promotional activity in weeks 1—6 (case 2). Now the dynamic model
predicts net incremental sales of only 57 units. Thus, in this case of recently
occurring previous promotions, the net incremental sales estimated from the
dynamic model is only 28% of the static model estimate. We conclude that the
dynamic model can produce intuitively reasonable and strongly different con-
clusions about incremental sales achievable from promotions.

6. Discussion

We have shown how dynamic promotion effects can be accommodated in


a varying parameter model. The magnitude and/or timing of past promotions
are allowed to affect the parameters representing current promotion effects and
store intercepts. For one of three brands we find that the magnitudes and timing

 Baseline sales are the sales that would occur had no brand offered any promotion.
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 265

Fig. 2. Brand A’s predicted sales in weeks 7—17 for store 1 for one promotional scenario under two
alternative histories.

of previous discounts have significant effects on the own-price elasticity. For


a second brand the effects of the time since the previous (price or non-price)
promotion on the multipliers (representing feature and display effects on sales)
are significant. For two of the brands the estimated store intercepts vary
significantly over time. Importantly, by allowing the store intercepts to vary
based on the magnitudes of past temporary price discounts and the time since
266 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

the previous price or non-price promotion we can estimate post-promotion


dips in sales. We find that the fluctuations in the parameter estimates are quite
large.
Because the recency of promotions and the magnitude of the price discount
have significant effects on parameter values, the timing and the size of the
discount at the store level will be important determinants of promotion deci-
sions to maximize profit. The dynamic model results offer more valid insight
into the net incremental sales from promotions than static models do, if stockpil-
ing by consumers is the primary reason for the existence of dynamic effects.
The response model we developed in this paper could be extended to address
optimization questions such as: ‘how often should a manufacturer schedule
a promotion?’ and ‘how deep should the discount be?’ (see also Tellis and
Zufryden, 1995). The response model also can be used to provide conditional
forecasts.
We have several other suggestions for future research. First, the model
outcomes will improve if we restrict the parameters in the dynamic models to
a meaningful range of values and apply constrained estimation methods. The
constraints will have to take into account the dependencies across the process
functions. Also, model extensions such as the inclusion of additional variables
(e.g. manufacturer advertising and couponing) are worth examining. In addition,
it is meaningful to incorporate retailers’ decision-making in the model. This
implies, e.g. that trade promotion offers be incorporated and the ‘pass-through’
of these promotions to the consumer (Neslin et al., 1995) be modeled. Especially
if the power of retail organizations increases over time, the decision-making
process of the retailer should be considered explicitly (Wensley, 1994).
Another issue that deserves more attention is the assumption that promotions
are exogenous. The static model is specified with separate store intercepts so
that parameter estimates are based on time-series variation. One reason is that
variation in promotional activities across stores results partly from variation in
consumer and competitor (other retailers) characteristics. Thus a model that
uses cross-sectional variation would have to account for such dependencies. For
time-series variation, the major question is whether the timing of promotional
activities is random. For product categories with little or no seasonality, includ-
ing the one used here, it seems reasonable to assume that promotions are
exogenous. If, however, this assumption is non-realistic, the model specification
and its calibration have to be adapted correspondingly.
Finally, it will also be useful to assess the generalizability of varying para-
meter model results. It is especially important that models account for stockpil-
ing, because goods that are easy to stock-up have greater price-promotion
elasticities than other goods (Litvack et al., 1985). A comparison of varying
parameter model results across product categories that differ in stockpiling
potential offers opportunities to test whether differences in the values of these
elasticities in static models are indeed due to this explanation.
E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 267

Acknowledgements

The authors thank ACNielsen (Netherlands) B.V. for the data.

References
Assunc7 a o, J., Meyer, R.J., 1993. The rational effect of price uncertainty on sales-price relationships.
Management Science 39, 517—535.
Blattberg, R.C., Neslin, S.A., 1990. Sales Promotion Concepts, Methods, and Strategies. Prentice-
Hall, Englewood Cliffs, NJ.
Blattberg, R.C., Neslin, S.A., 1993. Sales promotion models. In: Eliashberg, J., Lilien, G.L. (Eds.),
Handbooks in OR and MS, vol. 5, Elsevier, Amsterdam, pp. 553—609.
Bucklin, R.E., Gupta, S., 1996. Commercial adoption of advances in the analysis of scanner data.
Marketing Science Conference, Gainesville, Florida.
Foekens, E.W., 1995. Scanner data based marketing modelling: Empirical applications. Thesis,
University of Groningen, Faculty of Economics, The Netherlands.
Foekens, E.W., Leeflang, P.S.H., Wittink, D.R., 1994. A comparison and an exploration of the
forecasting accuracy of a loglinear model at different levels of aggregation. International Journal
of Forecasting 10, 245—261.
Foekens, E.W., Leeflang, P.S.H., Wittink, D.R., 1996. Varying parameter models to accommodate
dynamic promotion effects. SOM Research Report 96B35, Faculty of Economics, University of
Groningen.
Gatignon, H., Hanssens, D.M., 1987. Modeling marketing interactions with application to salesforce
effectiveness. Journal of Marketing Research 24, 247—257.
Gupta, S., 1988. Impact of sales promotions on when, what, and how much to buy. Journal of
Marketing Research 25, 342—355.
Helsen, K., Schmittlein, D.C., 1992. Some characterizations of stockpiling behavior under uncertain-
ty. Marketing Letters 3, 5—16.
Judge, G.G., Griffiths, W.E., Carter Hill, R. Lütkepohl, H., Lee, T.C., 1985. The Theory and Practice
of Econometrics, 2nd ed. Wiley, New York.
Krishna, A., 1991. Effect of dealing patterns on consumer perceptions of deal frequency and
willingness to pay. Journal of Marketing Research 28, 441—451.
Krishna, A., 1994. The impact of dealing patterns on purchase behavior. Marketing Science 13,
351—373.
Krishna, A., Currim, I.C., Shoemaker, R.W., 1991. Consumer perceptions of promotional activity.
Journal of Marketing 55, 4—16.
Leeflang, P.S.H., van Raaij, W.F., 1995. The changing consumer in the european union: A meta-
analysis. International Journal of Research in Marketing 12, 373—387.
Leeflang, P.S.H., Wittink, D.R., 1996. Competitive reaction versus consumer response: Do managers
overreact?. International Journal of Research in Marketing 13 (2), 103—119.
Litvack, D.S., Calantone, R.J., Warshaw, P.R., 1985. An examination of short-term retail grocery
price effects. Journal of Retailing 61, 9—25.
Neslin, S.A., Powell, S.G., Schneider Stone, L.G., 1995. The effects of retailer and consumer response
on optimal manufacturing advertising and trade promotion strategies. Marketing Science 41,
749—766.
Neslin, S.A., Schneider Stone, L.G., 1996. Consumer inventory sensitivity and the postpromotion
dip. Marketing Letters 7, 77—94.
Parsons, L.J., 1975. The product life cycle and time-varying advertising elasticities. Journal of
Marketing Research 12, 476—480.
268 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Raju, J.S., 1992. The effect of price promotions on variability in product category sales. Marketing
Science 11, 207—220.
Smith, S.A., McIntyre, S.H., Achabal, D.D., 1994. A two-stage sales forcasting procedure using
discounted least squares. Journal of Marketing Research 31, 44—65.
Tellis, G.J., Zufryden, F.S., 1995. Tackling the retailer decision maze: which brands to discount, how
much, when and why?. Marketing Science 14 (3), 271—299.
Van Heerde, H.J., Leeflang, P.S.H., Wittink, D.R., 1997. The estimation of pre- and postpromotion
dips with store-level scanner data. Working paper, University of Groningen, Faculty of Econ-
omics, Department of Marketing and Marketing Research, November.
Wensley, R., 1994. On a clear day you can see the market. in: Laurent, G., Lilien, G.L., Pras, B.,
(Eds.), Research Traditions in Marketing. Kluwer Academic Publisher, Boston, pp. 163—168.
Wittink, D.R., Addona, M., Hawkes, W., Porter, J.C., 1988. SCAN*PRO: the estimation, validation
and use of promotional effects based on scanner data. Working paper, Johnson Graduate School
of Management, Cornell University, February.