Cross-Coupons and Their Effect on Asymmetric Price Competition Between National and Store Brands

ABSTRACT - We investigate how cross-promotions by cross-coupons affect marketplace competition between national (higher-price/higher-quality) and store (lower-price/lower-quality) brands. In one experiment, 113 subjects were asked to choose between a national and a store brand of orange juice, after they had been endowed with either a national-brand or a store-brand cereal. Following their choice, subjects were invited to switch to the competitor orange juice based upon either a straight-coupon (the competitor carries a $x coupon for itself) or a cross-coupon (the cereal brand carries a $x coupon for the orange juice competitor). Subjects’ switching patterns evidenced four characteristics: (1) cross-coupons generated more switching to competitor brands than straight-coupons, (2) the traditional price-tier asymmetry was evident with straight-coupons and cross-coupons (i.e., store-brand choosers switched to discounted national brands more than national brand choosers switched to discounted store brands), (3) the national brand competitor attracted more switchers when it partnered with a store-brand carrier rather than a national-brand carrier, but (4) the relative price/quality of the cross-coupon carrier did not affect switching to the store-brand comptitor. Implications for retail strategies are discussed.

Citation:

Subimal Chatterjee, Timothy B. Heath, and Suman Basuroy (2000) ,"Cross-Coupons and Their Effect on Asymmetric Price Competition Between National and Store Brands", in NA - Advances in Consumer Research Volume 27, eds. Stephen J. Hoch and Robert J. Meyer, Provo, UT : Association for Consumer Research, Pages: 24-29.

Advances in Consumer Research Volume 27, 2000      Pages 24-29

CROSS-COUPONS AND THEIR EFFECT ON ASYMMETRIC PRICE COMPETITION BETWEEN NATIONAL AND STORE BRANDS

Subimal Chatterjee, Binghamton University

Timothy B. Heath, University of Pittsburgh

Suman Basuroy, Rutgers University

ABSTRACT -

We investigate how cross-promotions by cross-coupons affect marketplace competition between national (higher-price/higher-quality) and store (lower-price/lower-quality) brands. In one experiment, 113 subjects were asked to choose between a national and a store brand of orange juice, after they had been endowed with either a national-brand or a store-brand cereal. Following their choice, subjects were invited to switch to the competitor orange juice based upon either a straight-coupon (the competitor carries a $x coupon for itself) or a cross-coupon (the cereal brand carries a $x coupon for the orange juice competitor). Subjects’ switching patterns evidenced four characteristics: (1) cross-coupons generated more switching to competitor brands than straight-coupons, (2) the traditional price-tier asymmetry was evident with straight-coupons and cross-coupons (i.e., store-brand choosers switched to discounted national brands more than national brand choosers switched to discounted store brands), (3) the national brand competitor attracted more switchers when it partnered with a store-brand carrier rather than a national-brand carrier, but (4) the relative price/quality of the cross-coupon carrier did not affect switching to the store-brand comptitor. Implications for retail strategies are discussed.

INTRODUCTION

Cross-promotions are a popular strategy for marketers in retaining existing buyers and attracting new customers. Their application can be seen in many areas including network and cable television (e.g., viewers are asked to tune to sister station MSNBC for the post-game analysis after watching the NBA finals on NBC; New York Times June 19, 1996), utility services (e.g., a utility company stuffing its monthly bills with coupons encouraging customers to buy ProLight energy saving bulbs; Hendricks (1992)), not-for-profit marketing (e.g., donating fifty cents out of every dollar spent on Pizza Hut pizzas to the local fire department for a needed new piece of equipment; Delano (1982)), and consumer-goods promotions (e.g., McDonald’s giving away miniature versions of Furby with Happy Meals; Brandweek, October 26 1998)). Cross-promotions, it has been argued, can attract customers without devaluing brand equity, since the discounted brands do not carry the promotions themselves. For example, instead of carrying the discount itself, Budweiser may ally with Frito Lay’s and let the chips carry the coupons. Since carriers (or partners) carry the actual discounts, cross promotions are hard for competitors to detect and therefore give brand managers the opportunity to promote their brands without risking immediate competitive retaliation.

Cross-coupons, or the use of peel-off on-pack coupons to link discounts on one brand (target) with the purchase of another brand (carrier or partner) is one type of cross promotion. For example, a coupon for a free video rental from Blockbuster may be attached to the box of a Bigfooot pizza from Pizza Hut, pre-paid MCI calling cards may accompany every bouquet ordered from 1-800-FLOWERS, or customers may receive a 25% off Sears’ merchandise certificate after filing their taxes from H&R Block. Cross-coupons are particularly common in the packaged grocery business where even if the products are not similar, their distribution is, i.e., all the products are sold through the supermarket where consumers can buy all at once (Eisman, 1992). The current paper focuses on how cross-coupons may affect the competition between national and store brands, a focus motivated by a phenomenon evidenced in the purchase of packaged grocery items: buyers of store brands are more likely to switch to discounted national brands, than buyers of national brands are likely to switch to discounted store brands (asymmetric price competition: Bemmaor and Mouchox 1991; Blattberg and Wisniewski 1989; Heath, Ryu, Chatterjee, McCarthy, Mothersbaugh, Milberg and Gaeth 1999; Kamakura and Russell 1989; Sethuraman 1995; Walters 1991). In particular, we ask two questions: First, are cross-coupons more effective than straight-coupons in persuading customers to switch to competitor brands? Second, does the relative price/quality of the carrier brand affect how much switching takes place between national and private brands? For example, will a higher-quality carrier enhance the appeal of a store brand whose coupon it carries, or conversely, will a lower-quality carrier reduce the appeal of a national brand whose coupon it carries? Answering these questions, we believe, will shed new light into understanding the mechanisms involved in price-tier switching (see for example, Heath and Ryu, 1998), and enable us to recommend how best brand managers can insulate their brands from competition.

THEORY AND HYPOTHESES

Consider Scenario 1, where a consumer wishes to purchase cereal and orange juice. Brand X is the only available cereal-brand, while Brands A and B are the two available orange juice brands, Brand A being the national brand(higher-quality/higher-price) and Brand B being the store brand (lower-quality/lower-price).

Suppose that our hypothetical consumer is thinking of buying Brand A, when one of two things happens. In one scenario (Scenario 2), as she approaches the orange-juice aisle, the consumer observes that Brand B (the competitor brand) has a $1.00-off straight-coupon [We use the term straight-coupon to describe a coupon that is carried by the brand that is on promotion (e.g., Brand B orange juice), as opposed to a cross-coupon, a coupon that is attached to a carrier brand (e.g., Brand X cereal) promoting a different target brand (e.g., Brand B orange juice).] stuck to the carton. In the other scenario (Scenario 3), as she approaches the cereal-aisle, the consumer observes that Brand X cereal has a $1.00 off cross-coupon stuck to the box advertising $1.00 discount for Brand B orange juice.

The Effect of Separating the Coupon from the Competitor Brand

In Scenario 2, the coupon for Brand B orange juice is carried by Brand B itself. Since the consumer is contemplating whether or not to switch from Brand A (her initial choice) to Brand B, not using the straight-coupon implies an opportunity loss, i.e., forgoing a gain. In Scenario 3, however, the coupon for Brand B orange juice is carried by Brand X cereal, a brand the consumer has already purchased. Once the cereal is purchased, the coupon, along with the cereal, becomes part of the consumer’s endowment. Not using the cross-coupon, therefore, is a direct loss for the consumer. Since direct losses affect consumers’ value assessments more than forgone gains (Thaler, 1985), cross-coupons are more likely to generate unplanned or "opportunistic" switches (e.g., Bucklin and Lattin 1991) compared to straight coupons.

SCENARIOS 1, 2, 3

The above argument can be explained with the help of value functions of the type shown below (Kahneman and Tversky 1979; Tversky and Kahneman 1991):

v(x)=x^a, when x>0 (i.e., in gains), and

v(x)=b x^a, when x<0 (i.e., losses)

Here, v(x) is the subjective impact of a gain or loss of $x, a (<1) is an index of diminishing sensitivity and denotes that the impact of a $Ax change in price from the base price of $x diminishes as the value of $x increases, and b (>1) is the coefficient loss aversion and denotes that a $x loss is more unpleasant than an equivalent $x gain is pleasant. Not using a $1.00-off cross-coupon that is already part of the consumer’s endowment is an out-of-pocket loss that carries an impact of b times v($1). Failing to use a $1.00 straight coupon, on the other hand, is an opportunity loss of lesser impact, i.e., v($1). Thus,

H1: Cross-coupons will generate more switching to competitor brands than straight-coupons.

The Effect of Carrier Price/Quality

In Scenario 3 above, the carrier (cereal) brand has the same quality as that of the brand it promotes (Brand B orange juice; 5.25 on a 1 to 10 scale). Now, consider Scenario 4 where the carrier brand has better quality (but higher price) than the brand it promotes.

As before, suppose that our hypothetical consumer is thinking of buying Brand A orange juice (presumably she prefers quality to price for orange juice), but observes, as she approaches the cereal-aisle, that the cereal she will buy is carrying a $1.00-off cross-coupon for Brand B orange juice. The fact that a national brand (higher-quality) cereal is promoting a store brand (lower-quality) orange juice may lead to an image-transfer or a halo-type effect from the cereal to the orange juice. Alternatively, the consumer may think that the national brand cereal, by carrying a coupon for a lower-quality partner, is endorsing the store-brand orange juice. Independent of the mchanism involved, a higher-quality carrier can make up for the perceived weakness of a store brand, a compensation that a lower-quality carrier (Scenario 3) cannot accomplish. Thus,

H2: Store brands partnering with higher-quality carriers should attract more switchers than store brands partnering with lower-quality carriers.

Now consider Scenarios 5 and 6 below, where the hypothetical consumer is leaning toward Brand B orange juice (presumably she favors price over quality), but observes, as she approaches the cereal-aisle, that the cereal brand she will buy is carrying a $1.00 off coupon for the competitor brand of orange juice. In Scenario 5, the cereal is a lower-quality/lower-price store brand, in Scenario 6, the cereal is a higher-quality/higher-price national brand.

SCENARIOS 4, 5, 6

Assuming that our hypothetical consumer favors price over quality, she may be more concerned about the total amount spent on the shopping trip compared to quality consumed. Toward that end, should she be inclined to switch to the competitor brand (a brand that is more expensive), the lower-priced carrier (Scenario 5) saves her more money, compared to the higher-priced carrier (Scenario 6). Thus,

H3: National brands partnering with lower-priced carriers should attract more switchers rather than national brands partnering with higher-priced carriers.

EXPERIMENT

Method

Design and Stimuli. We designed a 2 X 2 experiment varying promotion-type (straight-coupons versus cross-coupons) and carrier-type (higher-price/higher-quality versus lower-price/lower-quality) between subjects.

Subjects received a booklet that asked them to imagine that they wished to buy cereal and orange juice. Only one brand of cereal (Brand X) was available, but subjects had a choice between Brands A and B of orange juice. Brand A was priced at $4.99 and had a quality rating of 8.75 (out of 10), whereas Brand B was priced at $2.99 and had a quality rating of 5.25 (out of 10). For half of the subjects, Brand X cereal was priced at $3.99 and had the same quality of Brand A orange juice (8.75), whereas for the other half of the subjects, Brand X cereal was priced at $1.99 and had the same quality of Brand B orange juice (5.25). After making their initial choice, subjects were directed to the appropriate page in the booklet where the competitor brand (i.e., the brand of orange juice that they did not choose) underwent a change. For half of the subjects the change was a $1.00 straight-coupon for the competitor brand, whereas for the other half of the subjects the change was a $1.00 cross-coupon for the competitor brand, the coupon being carried by Brand X cereal. For example, for subjects initially choosing Brand A, half of them observed, as they approached the orange juice aisle, a $1.00 straight-coupon attached to Brand B, whereas the other half of the subjects observed, as they approached the cereal-aisle, a $1.00 cross-coupon for Brand B attached to Brand X cereal. Similarly for subjects initially choosing Brand B, half of them observed, as they approached the orange juice aisle, a $1.00 straight-coupon attached to Brand A, whereas the other half of the subjects observed, as they approached the cereal-aisle, a $1.00 cross-coupon for Brand A attached to Brand X cereal. Subjects were asked whether they would like to remain with their chosen brand, or switch to the competitor brand. Table 1 describes the four experimental conditions as they appear to the subjects after their initial choice. All stimuli materials are available from the authors upon request.

TABLE 1

EXPERIMENTAL STIMULI

Subjects. One hundred and thirteen undergraduates enrolled at a large northeastern university served as subjects, and were given extra course credits for their participation.

Analysis and Results

Subjects’ switching measure (Yes, No) was subjected to a log-linear analysis with initial choice (higher-price/higher-quality national brand versus lower-price/lower-quality store brand), promotion-type (straight-coupons versus cross-coupons) and carrier-type (higher-price/higher-quality versus lower-price/lower-quality) serving as the independent predictors.

Cross-coupons versus straight-coupons. H1 predicted that cross-coupons would generate more switching compared to straight-coupons, a prediction that was supported by a significant main effect of promotion-type (c²₍₁₎=3.81, p=0.051). Subjects switched more when they were given cross-coupons compared to straight-coupons (44.78% versus 28.26%). Table 2 shows the switching magnitudes across all experimental conditions.

From Table 2, we observe that the ratio of the switching generated by cross-coupons compared to the switching generated by straight coupons varies from 1.12 to 2.81. Given our argument that not using a $x-cross coupon implies a direct loss of b x^a, whereas not using a $x- straight coupon implies a forgone gain of x^a, the ratio of the switching magnitudes should approximate b, or the loss-aversion coefficient. The typical value of b is about 2.25 (Tversky and Kahneman, 1992). In that respect, some of our b estimates are somewhat lower than what one might expect from more straightforward tests of loss aversion. One explanation is that our tests are conducted in a multi-attribute settings, where besides the simple loss aversion for the coupon involved, there is also involved loss aversion for the attribute sacrificed when switching occurs (e.g., losing quality when switching to the store brand, or losing price when switching to the national brand). Different attributes have different loss aversion coefficients (see for example, Hardie, Johnson, and Fader 1993)

Asymmetric price-tier competition. Asymmetric price-tier competition was evidenced by the significant main effect of choice. Store brand subjects switched to discounted national brands more than national brand subjects switched to discounted store brands (49.18% versus 25.00%; c²₍₁₎=7.34, p<0.01). The asymmetry held with straight-coupons (40.00% versus 14.29%; c²₍₁₎=3.55, p=0.06) and with cross-coupons (55.56% versus 32.26%; c²₍₁₎=4.18, p<0.05).

TABLE 2

SWITCHING FREQUENCIES ACROSS EXPERIMENTAL CONDITIONS

The effect of carrier price/quality. We had predicted that carriers that compensate for the weakness of the competitor brand will be more effective as cross-coupon partners compared to carriers that do not. Thus, H2 predicted that the store brand would benefit more partnering with a higher-quality carrier rather than with a lower-quality carrier. Similarly, H3 predicted that the national brand would benefit more partnering with a lower-priced carrier rather than with a higher-priced carrier.

The switching pattern that we observed supports H3, but not H2. Compared to the higher-priced carrier, the lower-priced carrier roughly doubled switching to the national brand competitor (75.00% versus 40.00%; (c²₍₁₎=4.41, p<0.05). However, and contrary to H2, the relative price/quality of the carrier brand did not affect switching to the store brand competitor (31.25% with the higher-quality carrier and 33.33% with the lower-quality carrier; (c²₍₁₎<1).

DISCUSSION

Although the phenomenon of asymmetric price competition between national and store brands has been studied quite extensively, no study that we know of has investigated how cross-coupons between national and tore brands may overcome such price-tier effects. Supermarket News (August 23, 1993) reports cross-coupon pilot studies involving Snuggle fabric softener (Lever Bros., national brand) and Shurfine bleach (private label), Borden cheese (national brand) and Shurfine crackers, Dean’s Dips (national brand) with Shurfresh chips. For example, a pilot study in which every package of Shurfresh chips carried a 15 cent coupon for Dean’s Dips resulted in a redemption rate of 11%. Our paper attempted to investigate this phenomenon experimentally. In particular, we wished to study whether cross-coupons would increase or decrease switching to competitor brands compared to straight-coupons, and whether the relative price/quality of the carrier brand would affect the amount of cross-tier switching. In that context, our paper reveals two important findings.

First, cross-coupons generate more switching to competitor brands compared to straight coupons. However, the price-tier effect shown to exist with straight-coupons is observed with cross-coupons as well. With straight coupons, the switching differential is 26% in favor of the national brand (i.e., 40% of store-brand subjects switch to the discounted national brand, whereas only 14% of national-brand subjects switch to the discounted store brand). With cross-coupons, the switching differential is 24% in favor of the national brand (56%B32%). Hence, although store brands do not benefit by changing from straight-coupons to cross-coupons in a relative sense (i.e., compared to national brands doing the same), they do benefit in an absolute sense. Whereas store brands can switch only 14% of national-brand buyers with straight-coupons, the number more than doubles (32%) with cross-coupons. The implication is important. If national brands use straight promotions but store brands counter with cross promotions, we may observe a reduction in the price-tier asymmetry.

Second, the relative price/quality of the carrier brand affects switching to the national brand competitor, but does not affect switching to the store brand competitor. For example, a store brand orange juice partnering with a national brand cereal is able to generate a competitive switching of 31%, a percentage that remains unchanged (33%) when the store brand partners with a store brand cereal. The higher-quality of the cereal carrier brand, therefore, does not appear to compensate for the inferior quality of the store brand orange juice. One explanation may be that consumers do not view quality as a transferrable asset, i.e., one cannot make up for consuming less quality in orange juice by consuming more quality in cereal. Price, on the other hand, may be more readily transferrable from one category to another, a fact that appears to have supporting evidence. Partnering with a lower-priced cereal, the national brand orange juice is able to generate a competitive switching rate of 75%, a percentage that drops to 40% when a higher-priced cereal serves as the carrier brand. The implication is that national brands stand to benefit substantially by a judicious choice of their cross-coupon partners, but store brands do not.

Our results present two useful recommendations for store-brand managers. First, store-brands can probably reduce the price-tier asymmetry substantially by resorting to cross-promotions, if their national brand competitors do not follow suit. Second, since the relative price/quality of the carrier brand does not affect switching to the store brand, store-brand managers need not search for higher-quality carriers for partners and coordinate production runs (for inserting coupons). For example, Grand Union orange juice can just as effectively partner with Grand Union cereal as ally with a higher-quality carrier, thereby substantially lessening logistical hurdles of the cross-coupon strategy.

Limitations. Finally, we need to address some limitations of our study. First, the stimuli are very sterile listing just price and quality ratings, and miss out the "noise" of a typical grocery environment. However, sterile environments are necessary in experiments to elminate competing mechanisms. Second, our subjects are forced into either a higher-quality tier or a lower-quality tier of the carrier brand, and there are always possible contaminants from the forced-choice carrier brand. For example, if subjects who generally favor store brands are forced to choose a higher-quality carrier, their predilection to move up in quality within the competitor tier may be stifled by the fact they have already been forced to pay more than what they would like for cereal. Thus, future studies may have subjects choose between price/quality tiers for targets and carriers. Unlike the current work, this will require multiple (more than one) carrier brands. For example, suppose that the consumer has a choice between two brands of orange juice, A and B, and two brands of cereal, X and Y. If she chooses Brands A and Y, we need to see how a cross-coupon for Brand B attached to Brand Y influences switching to Brand B, and how a cross-coupon for Brand X attached to Brand A influences switching to Brand Y. In short, we need to design studies that blur the distinction between targets and carriers.

Despite its limitations, the current paper marks the first experimental study in an area that is of considerable retail interest. It is hoped, therefore, that this exploratory study will generate further research into a relatively unexplored area.

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