A forecasting model to evaluate the profitability of price promotions

Experience over the years has led grocery store managers to spend almost all of their promotion money on adds in newspapers. The adds are generally advertised price reductions for specific products. These adds are usually cooperative adds in which the manufacturer whose product is featured in the display ad pay part of the cost of the ad. The rest of the cost is paid by the grocer. The grocer has a problem in evaluating the profitability of the price promotion. Different classes of consumers respond differently to the price promotions. To measure the impact of the price promotion becomes very difficult. In this paper the authors examine the different ways consumers respond to price promotions, and how the different responses affect profits. Using this data the authors develop a model that can forecast the profitability of specific price promotions. This model is then tested for three products at a very large grocery store chain in Finland.