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Analysing impact and effectiveness Premium promotions

“The notion that consumer promotions are informative and affect sales through more than offering a monetary incentive to purchase is not new, but it has never been applied to the context of free gift promotions” (Raghubir, 2004).

“a product or service offered free or at a relatively low price in return for the purchase of one or many products or services” (d’Astous & Jacob, 2002). Free gifts, premiums or premium promotions - terms often used interchangeably - segregate the promotional benefit in the form of a separate product that may either be complementary or not to the brand and/or product under promotion. Examples of premium promotions are free glasses with the purchase of a certain amount of soft drinks; or a free cooking tool with the purchase of 2 magarine boxes.

2.2.1 Ambiguous findings regarding premium promotions

The effectiveness of price promotions have been researched by a great amount of researches but the part of non-price promotions as premium promotional belongs to an underdeveloped research field. The literature review focus on what have been found already by researches about premium promotions.

These difficulties might include ‘negative quality inferences’; ‘greater weight to negative stimuli’; ‘purchase event feedback’; and ‘prior promotional purchase and brand usage’ that might increase price sensitivity, and will all be discussed in the next paragraphs.

Premium promotions can help to avoid negative quality inference to price promotions with might harm the effectiveness of price promotions. Mela, Gupta, & Lehmann (1997) concluded in their research that “In the long run, it is feared that sales promotions increase price sensitivity and destroy brand equity - both with retailers and consumers”. In the consumers mind the reference price of products becomes the discounted price instead of the normal price. Premiums can maintain the normal price as reference price as Darke and Chung define: “free gift promotion is effective in maintaining quality perceptions because consumers make quality inferences based on the original price rather than the price corrected for the value of the free gift. This implies that framing an offer as a separate free gift is a good tool to communicate value to customers”.

Besides consumers making quality inferences; sales promotions with overpriced products are likely to result in lower evaluations than those with normally priced products. This is because people pay greater attention to disadvantages, and negative stimuli get a greater weight in consumer decision making, as is argued by Makienko (2006). This implies many consumers are smarter than manufacturers and retailers think and framing promotions in a way that mislead consumers might not reap the expected benefits.

Gedenk and Neslin (1999) argue that “promotion is more than a short-term sales tool”. Promotions have long-term effects on purchase event feedback and consequently on future purchasing as well. Purchase event feedback is the “effect of current purchases on future brand preference” and it “is concerned with what consumers learn from the consumption experience” (Gedenk & Neslin, 1999). Gedenk and Neslin conclude one year later (2000) that “non-price promotions have no effect or are in fact associated with positive purchase event feedback, compared to purchases made off promotion”. This implies consumers might be positively educated by previous consumption experiences with premium promotions.

Closely related to the purchase event feedback literature stream developed by Gedenk and Neslin, is the study performed by Bridges, Briesch and Yim, 2006. The results of this study indicate that prior promotional purchases influence choice more than prior brand usage does, but that prior usage of a brand and prior promotional activities can both play roles in driving consumer promotional sensitivities. This implies consumers are influenced by promotions from the past when they make purchase decisions in the present and therewith also consider present promotions. The way consumers react to promotions may thus be influenced by the way they previously evaluated and reacted to promotions. In addition, as is concluded by

Bridges et al., retailers may prefer frequent promotions of national brands, because the increases in consumers’ price sensitivities lead to increased sales of lower priced local and regional brands. Premium promotions try to overcome consumer specific characteristics such as the price sensitivity described previously.

The goal of the previous paragraphs was to point out some difficulties often associated with (price) promotions and to emphasize that premium promotions have the potential to overcome some of these difficulties.

Rushing into conclusions concerning the effectiveness of premium promotions is too early however, since there are also some authors that touch upon some sideremarks and/or disadvantages regarding premium promotions or free gifts. Simonson, Carmon and O’Curry (1994) find that for products with unattractive premium promotions consumer preference decreases because consumers think they are paying extra for free gifts they do not want. The literal findings are that, “when consumers are uncertain about the values of products and about their preferences, such features and premiums provide

reasons against buying the promoted brands and are seen as susceptible to criticism”

(Simonson et al.). Besides the possibility that consumers do not want the premium promotions, people might draw inferences about this premium promotions rather than the promoted product, as argued by Raghubir (2004). People do not only draw inferences regarding the product they are buying, but possibly also about the quality and/or brand of the free gift attached to this product under premium promotion. “The fact that a manufacturer is providing a free gift along with purchase of their product, could either imply that the product itself was overpriced, or that the free gift was of low value - that is, free gift promotions could lead to inferences about the cost and margin structure of the promoted product or the free gift or

both” (Raghubir). Darke and Chung perfectly summarize this discussion regarding possible negative effects of premium promotions in 2005, by stating: “It is important to note that certain factors may limit the effects of a free gift offer. For instance, Simonson, Carmon, and O’Curry (1994) showed that consumer preference decreased when unattractive gifts were offered because consumers thought they were paying extra for a gift they did not want. In addition, it is important to state the monetary value of the gift. This was important because Raghubir (2004) shows consumers can underestimate the true value of a free gift when it is not explicitly tated, and thereby limit the overall value of the offer. It is therefore important to provide consumers with desirable free gifts, and to directly state the value of the gift in the ad itself.”

Another important remark here is that premium promotions require a larger amount of effort to implement as opposed to a regular price promotion. Strategically, creatively and logistically choosing a premium promotion that is of added value to the customer, which the company wants to be related to, which fits into the budgets and which is physically attainable

to the base product requires a huge amount of effort.

2.2.2 Consequences of premium promotions

Although the previous section might have shaded a different light on the possibilities of premium promotions, the problem statement of the thesis at hand is therewith not yet answered: How do premium promotions influence consumer’s category incidence, brand choice and purchase quantity decisions? The question whether people adjust their category incidence, brand choice and purchase quantity decisions in the presence of premium

promotions has never been investigated in depth. Of course, this question should be investigated taking many other factors into account that influence either the purchase decisions of consumers or the functioning of premium promotions, but before that, the terms category incidence, brand choice and purchase quantity should be defined. In purchasing, consumers over and over again make the decisions about when, what and how much to buy. Gupta (1988), wonders how these “three consumer decisions are modeled to decompose the sales ‘bump’ during the promotion period into sales increase due to brand switching, purchase time acceleration and stockpiling”. Phrased otherwise; the ‘what `decisions are related to brand switching; the ‘when’ choices affect purchase time acceleration.

Category incidence, brand choice and purchase quantity are thus crucial in examining the effects and effectiveness of promotions. The subdivision in brand switching, purchase time acceleration and stockpiling is nicely visualized in the formula developed by van Heerde, Gupta and Wittink (2003):

Sj = P(I)P(Cj|I)Qj

Where:

Sj = unit sales of brand j,

{I} = household makes a category purchase (purchase incidence),

{Cj} = household chooses brand j,

P(I) = probability of category purchase incidence,

P(Cj|I) = probability of choice of brand j given the purchase incidence, and

Qj = quantity bought given purchase of brand j.

This formula immediately touches upon an unstructured part of the literature stream of category purchase, brand choice and purchase quantity or, purchase incidence, brand choice and purchase quantity. This might seem confusing, but what complicates this situation is simply a matter of interchangeable use of terms and definitions. The terms category purchase

and purchase incidence define the probability that consumers buy in a certain category. Thus; before one can define category incidence (the term that will be used from now on), one needs to know whether indeed a purchase is made in that category or not. Besides the decision to purchase in a certain category, also decisions regarding brand choice and purchase quantities need to be made. This is exactly what is visualized perfectly in the formula above: the unit sales of a brand are defined by the probability of choice of the brand at hand given the category incidence, and quantity bought given purchase of the brand at hand.

Once the terms category incidence, brand choice and purchase quantity are defined, the question remains how premium promotions are used in the decision making process of purchasing certain items. Brown and Carpenter (2000) argue that during the process of making purchasing decisions, consumers are assumed “to choose on the basis of easily justified, cognitively available reasons - ideally, reasons based on important attributes for

which one brand is clearly superior”. When no decisions can be made based on important attributes, consumers will turn their decision process to the field of so-called trivial attributes. Trivial attributes are defined by Brown and Carpenter as a manufacturer adding “a relatively meaningless descriptor or feature to a brand in an attempt to differentiate it. A manufacturer may add an unrelated premium, add a unique ingredient to a product, or create a novel association with the brand”. Thus, “consumers sometimes treat trivial attributes as though they were critically important in the sense that they have a significant impact on choice” (Brown & Carpenter). Premium promotions - whether they are complementary or not to the brand and/or product under promotion - are one (of many) possibility to frame trivial attributes. This is because premium promotions are framed as an additional product that people receive when purchasing certain goods or brands, but do not affect the quality of those goods or brands. Since premium promotions are trivial attributes in purchasing decisions, it

might be useful to know whether these trivial attributes are positively or negatively valued.

Brown and Carpenter (2000) argue that trivial attributes being evaluated positively or negatively depends on the choice setting of the purchasing decision: “in some choice settings a positive reason may be more useful in arriving at a justifiable choice than a negative reason; in other settings a negative reason may instead be useful”. So: how should the choice setting look like in order for the trivial attribute to be evaluated positively? Brown and Carpenter solve this problem by differentiating between two situations: “when a single brand is distinguished by a trivial attribute, a positive valuation is more likely in larger choice sets than

in two brand sets. If two of three brands possess the trivial attribute a negative valuation is more likely than if only one of the three brands has the trivial attribute”. Thus: “valuation of a trivial attribute will depend not simply on its inherent worth but on the composition of the choice problem itself” (Brown & Carpenter). This implies that the same trivial attribute – such as providing free glasses with the purchase of three bottles of Coca Cola as a premium promotion - can both generate positive and negative evaluations based on the choice setting. If only one brand in the choice set (here Coca Cola) provides the free glasses as a trivial attribute, one may find to treat oneself with this additional feature and thus a positive evaluation based on the trivial attribute is made. When, on the other hand, only one soft drink brand in the choice set does not provide this premium promotion, one may conclude that this premium promotion is an overpriced gimmick. Although the trivial attribute application on premium promotions sounds plausible, one should also keep in mind negative evaluations are less likely in case of premium promotions because people might just like the idea of getting something extra without paying for it. Also, when premium promotion features are carefully designed and not randomly chosen, chances on negative evaluations are less likely. Premium promotions used in the online experiment conducted for this investigation are carefully selected, and characteristics on which these premiums are chosen can be found in section 3.5.Even more specified into the topic of premium promotions related to consumer benefits is the

research conducted by Liao (2006). In this research Liao argues that the essence of different types of non-monetary promotions may vary in their capability of creating appropriate incentives and preferences to consumers. Liao distinguishes non-monetary promotions on two dimensions: ‘instant-reward’ versus ‘delayed reward’ promotions and ‘same product’ versus

‘other product’ sales promotion. Concluding remark from this research is that “shopping goods which could be either utilitarian or hedonic or mixed in product values were detected to elicit stronger preference when the promotional reward comes from other product than the promoted one” (Liao, 2006). Findings from Liao (2006) indicate that for premium promotions to be efficient and effective, the premium should come from another product type than the promoted one.

This section so far has defined premium promotions as selling products through the offer of a free gift with purchase, which segregates the promotional benefit in the form of a separate product that may either be complementary or not to the brand and/or product under promotion. Is has been specified that the goal of this research is to find out how premium promotions influence consumer’s category incidence, brand choice and purchase quantity decisions. For premium promotions to be efficient and effective, taking care of how the choice set is framed is extremely important since the same trivial attribute can both generate positive and a

negative evaluations based on this choice setting (Brown & Carpenter, 2000). Important as well is that the free gift provided should preferably come from another product than the promoted one (Liao, 2006). Once one knows what premium promotions are and what factors should be thought of in the design of this promotional instrument, it is of added value to see how these premium promotions can be placed in the benefit congruence framework developed by Chandon, Wansink and Laurent (2000).

2.2.3 Placing premium promotions in the benefit congruence framework

The benefit congruence framework as developed by Chandon, Wansink and Laurent (2000) argues that monetary and non-monetary sales promotions offer different consumer benefits. Consequently, different types of products might benefit more from either monetary or nonmonetary sales promotions. The six sales promotion benefits consumers might experience described in section 2.1.2 can be subdivided into utilitarian and hedonic benefits, according to Chandon et al. Chandon et al. explains that, the monetary savings, quality and convenience benefits may be considered utilitarian benefits because they increase consumers’ acquisition utility, enhance shopping efficiency and are valued as being a means to an end. Since the

entertainment and exploration benefits are intrinsically rewarding, they can be classified as hedonic benefits. The value expression benefit can be characterized as both hedonic and utilitarian. “Nonmonetary promotions are evaluated primarily on the basis of their hedonic benefits, whereas monetary promotions are evaluated primarily on their utilitarian benefits” (Chandon, Wansink & Laurent, 2000). This statement is nicely visualized in figure 2.3 below:

Figure 2.3: Sales promotions benefit matrix

From: A benefit congruency framework of sales promotion effectiveness (p. 71),

by Chandon, P., Wansink, B., Laurent, G. (2000). Journal of Marketing, 64 (4).

20

“The various importance of the benefits sought implies, that the effectiveness of a sales promotion is higher when its benefits are congruent with those sought for the purchase occasion” (Chandon, Wansink & Laurent, 2000), meaning that - for example – when consumers mainly take prices into consideration (monetary savings benefit) when making a purchase decision for a certain item, the effectiveness of the sales promotion is likely to be higher when utilitarian benefits are focused on as compared to hedonic benefits. As might be observed in figure 1 above, premium promotions belong to the true non-price promotions category. Figure 3 shows free gifts (or premium promotions) are evaluated to a great extend by hedonic benefits and to a lesser extend on utilitarian benefits. Therefore free gifts, as being a non-monetary promotion type, should emphasize entertainment and exploration benefits in greater depth than monetary savings, quality and convenience benefits. Somewhat contradicting to the findings of Chandon, Wansink and Laurent (2000) is the research conducted by Palazon-Vidal and Delgado-Ballester (2005). In this research, sales promotions (both monetary and non-monetary) effects on consumer-based brand equity are examined. Since building a strong brand in the market is the goal of many organizations, it is interesting to see how sales promotions affect brand equity. Palazon-Vidal and Delgado- Ballester describe brand equity a follows: “brand equity is the differential effect that brand knowledge has on consumer response to the marketing of that brand. It is essential to stress that the differential response that makes up brand equity comes from various characteristics of brand associations in the consumer’s memory. Hence, brands with high equity are characterized by having a greater number of associations, and more net positive and unique

associations”. Questions that arise in this research are whether sales promotions have potential to build brand equity, whether monetary or non-monetary promotions are more effective for building brand equity and (most importantly here) whether the type of product affects the effectiveness of monetary and non-monetary promotions for building brand equity? Results

suggest that sales promotions do have a positive effect on brand knowledge and that nonmonetary promotions have more positive effects on brand knowledge than monetary promotions. “The interesting finding is that the direction of congruency effects between product and promotion types was contrary to that described by Chandon et al. (2000)” (Palazon-Vidal & Delgado-Ballester). Although Chandon et al. conclude that “nonmonetary

promotions are evaluated primarily on the basis of their hedonic benefits, whereas monetary promotions are evaluated primarily on their utilitarian benefits”, Palazon-Vidal and Delgado- Ballester find that “the results show that monetary incentives are more effective for utilitarian products while non-monetary promotions are equally effective for both utilitarian and hedonic products”. Thus, one may conclude that non-monetary promotions have higher potential to create brand equity as compared to monetary promotions, but that for hedonic products, nonmonetary promotions are not necessarily more effective.

2.3 Conclusion

Summarizing the previous literature review and findings of many authors and researchers, one can say that many different types of sales promotions exist and that their effects are numerous. Sales promotions may provide both utilitarian benefits as well as hedonic benefits for consumers. Hereafter special attention has been paid to premium promotions. Premium

promotions have been defined as selling products through the offer of a free gift with purchase, which segregates the promotional benefit in the form of a separate product that may either be complementary or not to the brand and/or product under promotion. The goal of this research is to find out how these premium promotions influence consumer’s category incidence, brand choice and purchase quantity decisions. For premium promotions to be efficient and effective, taking care of how the choice set is framed is extremely important since the same trivial attribute can both generate positive and a negative evaluations based on this choice setting (Brown & Carpenter, 2000). Important as well is that the free gift provided should preferably come from another product than the promoted one (Liao, 2006). Placing premium promotions in the benefit congruence framework of Chandon, Wansink and Laurent (2000) shows that the effectiveness of sales promotions is higher when its benefits are congruent with those sought for the purchase occasion. Based on the research conducted by Palazon-Vidal and Delgado-Ballester (2005) one may conclude that non-monetary promotions have higher potential to create brand equity as compared to monetary promotions, but that for hedonic products, non-monetary promotions are not necessarily more affective. For premium promotions – as being mostly evaluated on hedonic benefits – this means results are inconclusive about whether non-monetary promotions are more affective. Premium promotions have been discussed in more depth, also concerning important issues that should be kept in mind when framing this promotional instrument. One might think that, as long as different types of sales promotions focus on different benefit categories according to the benefit congruence framework and when this is taken into account by marketing departments, sales promotions have the potential to be effective. Why then, are sales promotions often less positive than we expect them to be? Although consumers have proven to like promotions, the effectiveness of different types of promotions provide mixed outcomes. Promotions – and in particular price promotions – have to deal with factors that complicate their effectiveness: people react differently to promotional efforts of high versus low priced brands; manufacturers and retailers do not fully cooperate and align goals; no permanent positive monetary effects of price promotions due to drastically reduced margins; negative quality inferences undermine deal value and moderate discount framing effects; pricepromotions are associated with negative purchase event feedback; and; national brands suffer from increased price sensitivity due to prior-promotional purchases. These difficulties regarding sales promotions are mostly overcome by premium promotions as might be concluded from the findings above. It is too early however to rush into conclusions about the effectiveness of premium promotions, since it is very important to provide consumers with desirable free gifts, and to directly state the value of the gift in the ad itself. When this is not properly taken care of, premium promotions decrease consumer preference of the overall value of the offer.

Overall, one may conclude that, the research question of ‘how premium promotions influence consumer’s category incidence, brand choice and purchase quantity decisions’ should be investigated taking into account factors that influence either the purchase decisions of consumers (e.g. the composition of the choice problem regarding trivial attributes) or the

functioning of premium promotions. Premium promotions seem to be a promising method for consumer promotions for the future as long as the premium promotion provides consumers with desirable free gifts, directly states the value of the gift and when the promotional benefit is segregated from the original product.

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