Many durable goods firms use price promotion strategies and advertising simultaneously to impact consumer preferences among vertically differentiated product offerings. In this research, we use a large secondary dataset of automotive purchases (N = 323,959) to investigate how advertising spending differentially moderates the positive impact of both customer- and retailer-directed price incentives on consumers’ premium level of purchase for vertically differentiated products. We find that higher advertising spending magnifies the positive impact of customer-directed price incentives on consumers’ preference for more premium purchases. In contrast, higher advertising spending attenuates the positive impact of retailer-directed price incentives on consumers’ preference for more premium purchases. Our work is distinct from previous research, which has almost exclusively focused on the CPG industry and the effects of advertising and price promotions on general demand metrics—instead of consumers’ preferences for premium products. Our work has important implications for practitioners and consumer welfare.
Although we report the difference in the choice (after vs. before incentive) as the dependent variable for the sake of simplicity, a repeated measures ANOVA of the 2 (Low Incentive vs. High Incentive) × 2 (Before Incentive vs. After Incentive) yielded a significant interaction (F(1, 173) = 13.22, p < .001) where those in the large incentive condition chose a more premium model after the incentive (Mafter incentive = 3.15) than before the incentive (Mbefore incentive = 2.58; F(1, 174) = 45.83, p < .001) while those in small incentive condition did not choose a more premium model after the incentive (Mafter incentive = 2.78; Mbefore incentive = 2.64; F(1, 174) = 2.53, p > .10).
The interaction of advertising and customer-directed incentives on expanding consumers’ consideration sets to include more premium offerings should occur whether consumers are first exposed to advertising and then the customer-directed incentive or, first exposed to the customer-directed incentive and then advertising.
Retailer-directed incentives are paid out by manufacturers to retailers differently depending on the industry. In the CPG industry, manufacturers pay retailers incentive money based on their wholesale buying behavior. In other words, if a retailer buys more of a specific product from a manufacturer in a given time period, they may receive a price discount or another financial payout. However, retailer-directed incentives in many durable goods industries pay retailers based on retail sales numbers. In other words, if a retailer sells to a customer, the retailer receives a financial payout from the manufacturer.