Do deep promotional discounts work? New study sheds light on strategy

A new study published in the Journal of Retailing shows that promotional discounts increase store traffic and lead to higher overall profits, especially if the advertised products are staples -- items such as meat and produce that are purchased frequently and by many customers.

"Our results validate the widespread use of price promotions supported by feature advertising, such as those found in newspaper circulars," said Dinesh Gauri, professor of marketing in the Sam M. Walton College of Business. "These featured promotions provided a beneficial impact on several key performance metrics, including store traffic, sales and profits."

Over a 49-week period, Gauri and co-authors Brian Ratchford at the University of Texas at Dallas, Joseph Pancras at the University of Connecticut, and Debabrata Talukdar at the University of Buffalo analyzed data on 27 product categories from 24 branches of a popular Northeastern grocery chain. Each week, the authors compiled data on overall traffic, sales per transaction, and profit margin for each store.

They examined the impact of so-called "loss leader" strategies -- the practice of deep promotional discounts to attract customers who will buy other items -- on several product categories, including penetration (items bought by many people), frequency (frequently purchased items), storability (items that can be stored, such as paper napkins or plates), impulse items and national brand items.

Their analysis of about 677,000 transactions, with an average value of $15.44 per transaction, showed that deep discounting, accompanied by a blitz of advertising promotions, achieved retailers' goal of attracting more customers into stores and increasing overall profits. But the researchers' main finding came with several caveats, Gauri said.

Promotional discounts on both high-penetration, high-frequency items (staples such as meat and produce) and low-penetration, low-frequency items (beer and condiments) led to increased traffic but lower sales per transaction.

"This suggests that these promotional discounts tend to attract small-basket customers," Gauri said.

However, discounts in these same categories were associated with higher overall profit margins, especially in the low-penetration, low-frequency category. Gauri said this suggests that the smaller transactions generated by the discounts contained an above average number of high-margin items, in addition to the discounted items.

"We think this result was driven mainly by beer, which was featured almost every week," Gauri said.

These other findings can also give retailers an edge, the researchers said:

• Broad discounting in one category may lead to diminishing returns.
• On average, discounts on national brand items had a stronger impact on per-transaction sales than discounts on non-brands.
• Consumers who took advantage of deep discount promotions on impulse products tended to buy products in more profitable categories.