Promotional Discounts Can Increase Traffic, Boost Profit: Study

Promotional discounts increase store traffic and lead to higher overall profits, especially if the advertised products are staples such as meat and produce that are purchased frequently, according to a new study published in the Journal of Retailing.

An analysis of about 677,000 transactions with an average value of $15.44 per transaction at a popular Northeastern grocery chain showed that deep discounting, accompanied by a blitz of advertising promotions, achieved retailers’ goal of attracting more customers into stores and increasing overall profits.

“Our results validate the widespread use of price promotions supported by feature advertising, such as those found in newspaper circulars,” says Dinesh Gauri, professor of marketing for the Sam M. Walton College of Business at University of Arkansas. “These featured promotions provided a beneficial impact on several key performance metrics, including store traffic, sales and profits.”

The researchers’ main finding came with several caveats, Gauri added.

Promotional discounts on both high-penetration, high-frequency items (staples such as meat and produce) and low-penetration, low-frequency items (beer and condiments) led to increased traffic but lower sales per transaction.

“This suggests that these promotional discounts tend to attract small-basket customers,” Gauri affirms.

However, discounts in these same categories were associated with higher overall profit margins, especially in the low-penetration, low-frequency category. Gauri says this suggests that the smaller transactions generated by the discounts contained an above average number of high-margin items, in addition to the discounted items.

“We think this result was driven mainly by beer, which was featured almost every week,” Gauri notes.

These other findings can also give retailers an edge, according to the researchers:

Broad discounting in one category may lead to diminishing returns.

On average, discounts on national brand items had a stronger impact on per-transaction sales than discounts on nonbrands.

Consumers who took advantage of deep discount promotions on impulse products tended to buy products in more profitable categories.