Long-Run Effects of Promotion Depth on New Versus Established Customers: Three Field Studies

Abstract

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.