Content area
Full text
We use the results of three large-scale field experiments to investigate how the depth of a current price promotion affects future purchasing of first-time and established customers. While most previous studies have focused on packaged goods sold in grocery stores, we consider durable goods sold through a direct mail catalog. The findings reveal different effects for first-time and established customers. Deeper price discounts in the current period increased future purchases by first-time customers (a positive long-run effect) but reduced future purchases by established customers (a negative long-run effect). Overall, the results show evidence of several long-run effects: forward buying, selection, customer learning, and increased deal sensitivity. Short-run metrics that ignore these effects overstate the overall change in demand for established customers. The implication is that if prices are set based on short-run elasticity, then they will be too low. Among first-time customers, the short-run metrics underestimate the total increase in demand. If prices are set based on short-run elasticity, then they will be too high.
Key words: price promotions; pricing; long-term effects; forward buying; purchase acceleration; deal sensitivity; catalogs
History: This paper was received February 19, 2002, and was with the authors 10 months for 2 revisions; processed by Scott Neslin.
1. Introduction
We present the results of three large-scale field experiments that show that the depth of a price promotion can affect repeat-purchase probabilities even up to two years later. The three studies were conducted with the cooperation of a mail-order catalog firm that sells durable goods. A key feature of the studies is that we are able to separately identify customers who have never purchased from this catalog before (prospective customers) from customers who have purchased before (established customers). With respect to repeat-purchase rates, we find that increasing the depth of a price promotion has a positive long-run effect among prospective customers and a negative long-run effect among established customers.
Of the three studies we present, two involved prospective customers, while the third study involved established customers. In each study, either a Promotion or a Control version of a "Test Catalog" was sent to randomly assigned samples of actual customers. The two versions were identical with the exception that the depth of the price promotion was greater for some items in the...