A Structural Equations Analysis of the Impact of Price Promotions on Store Performance

Guided by past research, conventional wisdom in the retailing area, and microeconomic theory, the authors develop a series of hypotheses about the effects of loss leaders, in-store price specials, and double coupon promotions on overall store sales, profit, and traffic. The resulting system of structural relationships is tested and cross-validated with data from two large supermarkets. The findings indicate that (1) though most of the loss leader promotions had no effect on store profit, those loss leaders that did affect profit did so through their effect on store traffic rather than through their effect on sales of the promoted items, (2) double coupon promotions affected profit by increasing sales of products purchased with a coupon rather than by increasing store traffic, and (3) in-store price specials appear to have had no effect on store profit, sales, or traffic. The results of the study also emphasize the importance of building store traffic to increase retailer profit and of examining the effects of price promotions within the context of a system of relevant equations.