Marketing Engineering: Measuring Price Elasticity for Store Brands and National Brands 黃明新 博士 中山大學企管系助理教授 2008 年 12 月 4 日於成功大學 2008 年 12 月 4 日於成功大學

Copyright_Min-Hsin Huang Marketing Engineering It’s Gary L. Lilien who coined the term marketing engineering. It’s Gary L. Lilien who coined the term marketing engineering. Marketing engineering refers to the use of decision models for making marketing decisions. Marketing engineering refers to the use of decision models for making marketing decisions.

Copyright_Min-Hsin Huang The Process of Marketing Engineering Source: Lilien and Rangaswamy 2003, Marketing Engineering, P4

Copyright_Min-Hsin Huang An Example: Pricing Strategy for Store Brands and National Brands The importance of price elasticity in pricing strategy. The importance of price elasticity in pricing strategy. How to estimate price elasticity? How to estimate price elasticity? Using store level scanner data to estimate price elasticity for store brands and national brands Using store level scanner data to estimate price elasticity for store brands and national brands

Copyright_Min-Hsin Huang Questions frequently raised by marketing managers Should I reduce my PRICE? 5%? 10%? 20%?....

Copyright_Min-Hsin Huang Price Elasticity (Sensitivity) Pricing strategy Pricing strategy |ε|<1 price discount will NOT increase total sales |ε|>1 price discount will increase total sales but profit will increase or decrease

Copyright_Min-Hsin Huang Source: Best 2005, Market-Based Management, 4th ed. p257.

Copyright_Min-Hsin Huang How do we know about price elasticity? Data? Data? Models? Models? OLS (Ordinary Least Square) OLS (Ordinary Least Square) Q=a+bP Q=a+bP b: price elasticity b: price elasticity

Copyright_Min-Hsin Huang Scanner data in marketing strategy research Scanner data in marketing strategy research Models Scanner Data Issues Sales Response Model Store-Level Data Market Response Discrete Choice Model Household Panel Data Consumer Behavior

Copyright_Min-Hsin Huang Theory of Consumer Demand

Copyright_Min-Hsin Huang Almost Ideal Demand System (AIDS; Deaton and Muellbauer, 1980) Theoretical restriction of parameters: Theoretical restriction of parameters: –Adding-up: ; ; –Homogeneity: –Symmetry:

Copyright_Min-Hsin Huang Own-Price Elasticities

Copyright_Min-Hsin Huang A Puzzle Price Elasticity (ε) : (Bijmolt, Van Heerde, and Pieters, 2005 JMR). Price Elasticity (ε) : (Bijmolt, Van Heerde, and Pieters, 2005 JMR). ε ｜ private label ︱ > ? ? < ε ｜ national brand ︱

Copyright_Min-Hsin Huang Store Brands (Private Labels) Owned merchandised by a particular retailer Owned merchandised by a particular retailer The prominence of store brands The prominence of store brands –Lower price but higher margin –Create store loyalty (store differentiation) –Retailer’s power in channel argument –Market share is increasing

Copyright_Min-Hsin Huang Brand Equity Higher brand equity implies lower price elasticity Higher brand equity implies lower price elasticity Competitive advantage: Competitive advantage: –Store brands vs. National brands –Channel advantage vs. Brand advantage

Copyright_Min-Hsin Huang Research Objectives Analyze consumers’ price sensitivity for private labels and national brands within different socioeconomic environments Analyze consumers’ price sensitivity for private labels and national brands within different socioeconomic environments Investigate how socioeconomic status impacts price response to private labels and national brands. Investigate how socioeconomic status impacts price response to private labels and national brands.

Copyright_Min-Hsin Huang Hypotheses Development (e.g., Lemon and Nowlis 2002) Research on price-tier competition show that price promotion benefits national brands more than it benefits private labels (e.g., Lemon and Nowlis 2002) H Higher-income consumers to have a higher-level of loyalty for national brands (e.g., Hoch 1996; Sivakumar and Raj 1997) Brand loyalty to reduce price sensitivity (e.g., Brown 1974; Krishnamurthi and Papatla 2003; Krishnamurthi and Raj 1991; Wernerfelt 1991) Brand loyalty to reduce price sensitivity (e.g., Brown 1974; Krishnamurthi and Papatla 2003; Krishnamurthi and Raj 1991; Wernerfelt 1991) H2 & H H2 & H

Copyright_Min-Hsin Huang Hypotheses H 1 : For the pooled samples: H 1 : For the pooled samples: ε ｜ national brand ︱ > ε ｜ private label ︱ ε ｜ national brand ︱ > ε ｜ private label ︱ H 2 : For lower-income stores: H 2 : For lower-income stores: ε ｜ national brand ︱ > ε ｜ private label ︱ ε ｜ national brand ︱ > ε ｜ private label ︱ H 3 : For higher-income stores: H 3 : For higher-income stores: ε ｜ national brand ︱ < ε ｜ private label ︱ ε ｜ national brand ︱ < ε ｜ private label ︱

Copyright_Min-Hsin Huang Data Store-level scanner data provided by a national supermarket chain in the Columbus, Ohio metropolitan area (CMA) Store-level scanner data provided by a national supermarket chain in the Columbus, Ohio metropolitan area (CMA) Seven product categories Seven product categories 69 weeks from December 2000 to April weeks from December 2000 to April 2002

Copyright_Min-Hsin Huang Six Stores in Two Distinct Socioeconomic Groups Lower-income stores Higher-income stores Income under $10,000 12%4% Income over $75,000 12%34% College graduates 10%38% Minorities22%4%

Copyright_Min-Hsin Huang Location of Six Stores

Copyright_Min-Hsin Huang

Estimated Own-Price Elasticities by Store Location H2 H3 H1

Copyright_Min-Hsin Huang Conclusions National brands have larger price elasticities than private labels National brands have larger price elasticities than private labels Results hold in lower- and higher- income stores Results hold in lower- and higher- income stores

Copyright_Min-Hsin Huang Marketing Decision Implementations National brands need to face the pressure of reducing price National brands need to face the pressure of reducing price Store specific pricing strategy rather than price zone Store specific pricing strategy rather than price zone