Assessing Customer Evaluation and Revenue Consequences of Component Sharing Across Brands in the Vertical Product Line

Component sharing may look great in the boardroom, but not in the showroom. Indeed, savings on R&D and production costs could be offset by a plunge in customer brand attractiveness and willingness to pay. This paper investigates the impact of component sharing on customer evaluation of luxury, volume and economy brands offered in a car manufacturer’s vertical product line and its subsequent revenue consequences. The authors consider both the harm to the higher-end brand and the benefits for the lower end brand, and analyze with a random effects model how the size of these effects depends on the brand combination, the type of component, the source of the components sharing, and customer characteristics. An experimental study shows that the harm for the higher-end brand is largest, when (1) a luxury brand shares components with a volume brand, (2) the source of the components is the higherend brand, and when (3) the customer has a high initial evaluation of the higher-end brand. For the lower-end brand, the positive effect is largest, when (1) a volume brand shares with an economy brand, (2) the lower-end brand is the source of the components, and (3) customers have a high initial evaluation of the higher-end brand. Components that have a strong impact on evaluation are interior, wheels, chassis and the engine. Simulations show that sharing components typically translates in negative revenue consequences for both analyzed manufacturers. An interesting exception emerges for the Japanese manufacturer, which obtains a boost in total revenue when its small luxury brand shares components with its large volume brand

Reference-based transitions in short-run price elasticity

Marketing literature has long recognized that price response need not be monotonic and symmetric, but has yet to provide generalizable market-level insights on reference price type, asymmetric thresholds and sign and magnitude of elasticity transitions. In this paper, we introduce smooth transition models to study reference-based price response across 25 fast moving consumer good categories. Our application to 100 brands shows that 77% demonstrate reference-based price response, of which 36% reflects historical reference prices, 31% reflects competitive reference prices, and 33% reflects both types of reference prices. This reference-based price response shows asymmetry for gains versus losses on three levels: the threshold size, the sign and the magnitude of the elasticity difference. For historical reference prices, the threshold size is larger for gains (20%) than for losses (12%) and the assimilation/contrast effects for gains (-0.41) are smaller than the saturation effects for losses (0.81). For competitive reference prices, the threshold size is smaller for gains (3%) than for losses (16%), and the saturation effects are larger for gains (0.33) than for losses (0.15). These results are moderated by both brand and category characteristics that affect reference price accessibility and diagnosticity. Historical reference prices more often play a role for national brands, for planned purchases and in inexpensive categories with low price volatility and high purchase frequency. When price discounting, high-share brands face larger latitudes of acceptance. When raising prices, saturation effects set in later for brands with high price volatility and for categories with high price spread and for planned purchases. As for competitive reference prices, saturation effects set in later for expensive brands with high price volatility and in categories with lower price volatility, higher price spread and higher concentration. Sales, revenue and margin implications are illustrated for price changes typically observed in consumer markets

Do Promotions Benefit Manufacturers, Retailers or Both?

While there has been strong managerial and academic interest in price promotions, much of the focus has been on the impact of such promotions on category sales, brand sales and brand choice. In contrast, little is known about the long-run impact of price promotions on manufacturer and retailer revenues and margins, although both marketing researchers and practitioners consider this a priority area (Marketing Science Institute 2000). Do promotions generate additional revenue and for whom? Which brand, category and market conditions influence promotional benefits and their allocation across manufacturers and retailers? To answer these questions, we conduct a large-scale econometric investigation of the effects of price promotions on manufacturer revenues, retailer revenues and margins. This investigation proceeds in two steps. First, persistence modeling reveals the short- and long-run effects of price promotions on these performance measures. Second, weighted least-squares analysis shows to what extent brand and promotion policies, as well as market-structure and category characteristics, influence promotional impact. A first major finding of our paper is that price promotions do not have permanent monetary effects for either party. Second, in terms of the cumulative, over-time, promotional impact on their revenues, we find significant differences between the manufacturer and retailer. Price promotions have a predominantly positive impact on manufacturer revenues, but their effects on retailer revenues are mixed. Retailer (category) margins, in contrast, are typically reduced by price promotions. Even when accounting for cross-category and store-traffic effects, we still find evidence that price promotions are typically not beneficial to the retailer. Third, our results indicate that manufacturer revenue elasticities are higher for promotions of small-share brands and for frequently promoted brands. Moreover, they are higher for storable products and lower in categories with a high degree of brand proliferation. Retailer revenue elasticities, in turn, are higher for brands with frequent and shallow promotions, for storable products and in categories with a low extent of brand proliferation. As such, from a revenue-generating point of view, manufacturer and retailer interests are often aligned in terms of which categories and brands to promote. Finally, retailer margin elasticities are higher for promotions of small-share brands and for brands with infrequent and shallow promotions. Thus, the implications with respect to the frequency of promotions depend upon the performance measure the retailer chooses to emphasize. The paper discusses the managerial implications of our results for both manufacturers and retailers and suggests various avenues for future research

Do Promotions Benefit Manufacturers, Retailers or Both?

While there has been strong managerial and academic interest in price promotions, much of the focus has been on the impact of such promotions on category sales, brand sales and brand choice. In contrast, little is known about the long-run impact of price promotions on manufacturer and retailer revenues and margins, although both marketing researchers and practitioners consider this a priority area (Marketing Science Institute 2000). Do promotions generate additional revenue and for whom? Which brand, category and market conditions influence promotional benefits and their allocation across manufacturers and retailers? To answer these questions, we conduct a large-scale econometric investigation of the effects of price promotions on manufacturer revenues, retailer revenues and margins. This investigation proceeds in two steps. First, persistence modeling reveals the short- and long-run effects of price promotions on these performance measures. Second, weighted least-squares analysis shows to what extent brand and promotion policies, as well as market-structure and category characteristics, influence promotional impact. A first major finding of our paper is that price promotions do not have permanent monetary effects for either party. Second, in terms of the cumulative, over-time, promotional impact on their revenues, we find significant differences between the manufacturer and retailer. Price promotions have a predominantly positive impact on manufacturer revenues, but their effects on retailer revenues are mixed. Retailer (category) margins, in contrast, are typically reduced by price promotions. Even when accounting for cross-category and store-traffic effects, we still find evidence that price promotions are typically not beneficial to the retailer. Third, our results indicate that manufacturer revenue elasticities are higher for promotions of small-share brands and for frequently promoted brands. Moreover, they are higher for storable products and lower in categories with a high degree of brand proliferation. Retailer revenue elasticities, in turn, are higher for brands with frequent and shallow promotions, for storable products and in categories with a low extent of brand proliferation. As such, from a revenue-generating point of view, manufacturer and retailer interests are often aligned in terms of which categories and brands to promote. Finally, retailer margin elasticities are higher for promotions of small-share brands and for brands with infrequent and shallow promotions. Thus, the implications with respect to the frequency of promotions depend upon the performance measure the retailer chooses to emphasize. The paper discusses the managerial implications of our results for both manufacturers and retailers and suggests various avenues for future research

When do price thresholds matter in retail categories?

Marketing literature has long recognized that brand price elasticity need not be monotonic and symmetric, but has yet to provide generalizable market-level insights on threshold-based price elasticity, asymmetric thresholds, and the sign and magnitude of elasticity transitions. This paper introduces smooth transition regression models to study threshold-based price elasticity of the top 4 brands across 20 fast-moving consumer good categories. Threshold-based price elasticity is found for 76% of all brands: 29% reflect historical benchmark prices, 16% reflect competitive benchmark prices, and 31% reflect both types of benchmarks. The authors demonstrate asymmetry for gains versus losses on three levels: the threshold size and the sign and the magnitude of the elasticity difference. Interestingly, they observe latitude of acceptance for gains compared to the historical benchmark, but saturation effects in most other cases. Moreover, category characteristics influence the extent and the nature of threshold-based price elasticity, while individual brand characteristics impact the size of the price thresholds. From a managerial perspective, the paper illustrates the sales, revenue, and margin implications for price changes typically observed in consumer markets