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Jie Zhang and Michel Wedel

Jie Zhang and Michel Wedel


Comparing Promotional Strategies for Online and Offline Channels

8/23/2004 --

Marketers must use different strategies for online and brick-and-mortar stores to improve the profitability of customized price promotion programs.

ANN ARBOR, Mich.–Marketers can improve the profitability of customized price promotion programs by offering loyalty promotions to Internet shoppers through their online stores and offering competitive promotions to conventional buyers at their brick-and-mortar retail outlets, according to a recent University of Michigan Business School study.

In addition, the findings indicate that customizing promotions directed at individual consumers and households is more suitable for online venues, which hold a large untapped profit potential. In contrast, optimizing mass-market promotions or segment-level promotions appears to be more cost effective and profitable in traditional stores.

"Brick-and-mortar and online shopping venues each have their unique advantages in terms of promotion effectiveness," says Jie Zhang, assistant professor of marketing at the Michigan Business School. "Online stores are a more appealing channel for retaining a brand's existing customers while traditional brick-and-mortar stores present a better channel for acquiring new customers of a brand."

In their study, Zhang and Business School colleague Michel Wedel, the Dwight F. Benton Professor of Marketing, use household-purchase data of two product categories, stick butter and liquid detergent, to evaluate the relative effectiveness and profit potential of various promotion strategies in online and offline stores. Their data, provided by a leading Internet grocery retailer and Information Resources Inc., covers a two-year period, 1997 to 1999.

Three levels of customization are considered in the study. These include a "mass promotion" where the same price discount is offered to all customers, a "targeted promotion" where the price discount varies by consumer segments, and a "personalized promotion," which is tailored toward each household and adjusted on each individual shopping trip.

Zhang and Wedel also identify two types of promotion orientations–competitive promotions" aimed at consumers who did not buy the target brand on the previous purchase occasion and "loyalty promotions" directed at consumers who did. The two researchers calculate the optimal price discounts that maximize the gross profit of a brand for each promotion plan, both in online and offline stores.

"Our results suggest that it may not be worthwhile to invest in personalized price promotions in brick-and-mortar stores, at least for the product categories studied here," Wedel says. "However, our study does confirm that online stores are a substantially more appealing venue to implement personalized price promotions."

The researchers say competitive promotions can be expected to generate higher profits in brick-and-mortar stores, whereas loyalty promotions are more likely to produce better returns in online stores. Contrary to popular wisdom, online shoppers appear to be less promotion-sensitive than their offline counterparts.

Finally, Zhang and Wedel suggest that the Internet is the preferred venue for large, well-known brands with loyal customer bases in terms of promotion effectiveness, whereas brick-and-mortar stores provide a better venue for smaller, lesser-known brands, which must attract new buyers.

"Given the differences in promotion efficiencies between online and brick-and-mortar stores, we conjecture that traditional retailers can benefit from opening their own Internet stores," Zhang says. "A dual-channel strategy enables traditional retailers to enjoy the benefits of both worlds and to offer one-stop promotional services to manufacturers who carry multiple brands in many product categories."

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847