Why firms do co-promotions in mature markets?

doi:10.1016/j.jbusres.2006.04.002

Journal of Business Research

Volume 59, Issue 9, September 2006, Pages 1035-1042

https://doi.org/10.1016/j.jbusres.2006.04.002 Get rights and content

Abstract

When their products or services reached the mature stage of life cycle, many telecommunications firms started to form alliance partnering with companies in other industries such as movie theaters and fast food restaurants. They offer discounts to their consumers when they buy products or services from their partnering companies. We show that, even in markets where the total demand does not grow, such co-promotion partnering with companies in different industries can benefit allied firms as well as target consumers who buy products or services from the allied firms. The benefits come from discriminating prices between consumers in price-sensitive segments and price-insensitive segments.

Introduction

As the telecommunications market in Korea got closer to its saturation level, the market growth rate slowed down substantially. At this point, telecommunications companies in Korea started to form alliances with companies in other industries. They started membership programs and shared benefits of the programs with partnering companies. These companies offer discounts to their consumers who have membership cards when they buy products or services of their partners. All or a portion of the partners' losses coming from the discounts is supported by the telecommunications companies.

What would be the motivation for the telecommunications companies to introduce the co-promotion at the mature stage of their life cycle when there is little room for growth in the total demand? Will it be profitable to do the co-promotion even when it does not expand the total market? A clue may be rooted in their market segmentation. Typically, these companies segment the market based on ages, an attribute that is closely related to price sensitivity. It is well-known that teenagers are highly price-sensitive whereas adults of older ages are not. For different segments, telecommunications companies developed unique brands that provide maximum overall benefits to their target consumers. For example, for brands targeted at teenagers, they formed alliance with movie theaters and westernized fast-food restaurants. In case of brands targeted at adults, they formed alliance with firms in family traveling and childcare industries. Since then, competition among the telecommunications companies became that among groups of allied companies led by telecommunications companies.

This paper focuses on one of the typical co-marketing alliances in which companies offer discounts to the customers when they buy products or services of other partnering companies. We will use the term co-promotion in this article to denote this type of co-marketing practice. The alliance led by telecommunications companies in Korea is one example. Other examples include joint co-promotion between airline companies and travel agencies and that between AAA automobile club and its partnering restaurants.

The study addresses two questions for companies leading such co-promotion alliances: (1) Will co-promotion increase the firms' profits even when the market demand is not affected by the co-promotion? (2) Will co-promotion be an effective strategy even when competitors respond with the same co-promotion strategy?

To address these issues, the article develops and analyzes a game theoretic model involving two competitors in each of three different industries. In the focal industry, there are two groups of consumers – those who are relatively price-sensitive and those who are not. The competitors in the focal industry consider forming alliance for co-promotion with companies in two other industries. One industry serves price-sensitive consumers and the other serves price-insensitive consumers. Our analysis shows that there are incentives for both competing firms in the focal industry to implement co-promotions. These firms competing in the market segmented by different price-sensitivity can increase profits by discriminating prices between the segments even if we assume that the total market is not affected by the co-promotion.

In the following sections, we briefly review the related literature, present a model to be analyzed, explain how the model is analyzed, describe analytic results, and discuss implications of the main results.

Section snippets

Literature

In today's marketplace, inter-brand cooperation in a variety of corporate alliances often augments competition (Samu et al., 1999). The formation of alliance is an important strategic tool for attaining company objectives (Chen and Chen, 2005, Rao and Ruekert, 1994). Many co-marketing alliances are formed to enhance marketing potentials by constructing or enlarging consumer benefits they provide (Adler, 1966, Bucklin and Sengupta, 1993). Co-marketing alliances include brand alliances,

Three duopoly markets of six firms

Two firms are competing in the focal market of product category X. We also consider two other markets of product categories Y^H and Y^L. There are two competitors in each of these markets, too. In general, firms in the three industries are all different. Consumers of the three products may use them independently or jointly. Normally, purchasing one of the products does not affect the purchase of other products.

Although competing firms are different for different product categories, we will use

Analysis

The focal firms are competing in the product category X. Each of two competing firms, X_a and X_b, considers whether to implement the co-promotion forming an alliance with firms in other product categories. The co-promotion offers discount to their consumers who purchase the products of their allied partners in different industries. The allied firms share cost of the co-promotion program. The product category for co-promotion depends on decision of the target segment because consumers in

Discussion

This paper presents and analyzes a model of co-promotion for duopoly firms in three different industries where the focal industry is segmented by price sensitivity and each of the other two industries serves one of the two market segments. In contrast to other price discrimination models in competitive settings, our model suggests that there can be situations making all the firms participating in co-promotion alliances better-off or at least not making them worse-off. Co-promoting firms can be

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Should companies jointly promote their complementary products when they compete in other product categories?
2016, European Journal of Operational Research
Citation Excerpt :
On the other hand, allowing brand managers to undertake joint promotional programs for complementary products with a company that also sells competitive products may not only have adverse effects on overall sales and profits—it can also hurt brand image, especially if a joint program contributes, directly or indirectly, to developing preferences for the partners’ competitive products. A joint promotion between two or more companies to sell products that complement each other is believed to improve the efficiency and effectiveness of partners’ promotional activities (Karray & Sigué, 2015; Rao & Ruekert, 1994; Samu, Krishnan, & Smith, 1999; Son, Hahn, & Kang, 2006; Varadarajan, 1985; 1986). Products are complementary when consumers simultaneously use them to satisfy some specified needs as with the example of instant coffee and coffee creamer above.
Joint promotions, whereby companies pool marketing resources to promote their brands, are increasingly used to reduce marketing costs and develop common business opportunities, but formal knowledge about how they should be effectively implemented remains sparse. This paper investigates whether firms should jointly promote their complementary products when they also offer substitute products in another category. It also studies whether companies should partner with allies that can or cannot leverage on joint promotion to create spillover in their product portfolios. Our main findings are as follows. A company’s decision to enter or not to enter into a joint promotion depends on the presence and nature (positive or negative) of promotion spillover in its own product portfolio and the effect of joint promotion on each complementary product demand. Particularly, in the absence of spillover effect, joint promotion may not be mutually beneficial if its direct effects on the two complementary products are asymmetric. On the other hand, depending on its direct effects on the complementary products, joint promotion could be a profit-enhancing activity for the two firms even when it negatively affects the demand of their substitute products by intensifying price competition. Finally, we discuss the implications of branding strategies on the effectiveness of joint promotion. The results in this paper are useful for firms offering products in different categories where joint promotional spillover can occur.
A game-theoretic model for co-promotions: Choosing a complementary versus an independent product ally
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There is general agreement that promotional alliances have the potential to help achieve various marketing communications goals, including brand awareness, brand knowledge, and quality signaling (e.g., [21,30]). They can also help participating firms reach greater cost efficiency since, in many cases, promotional partners share the burden of their joint promotional activities [28]. The effectiveness of joint promotions are also believed to be higher compared to partners׳ individual promotional activities due to larger promotional budgets, collective marketing efforts of participating firms, favorable consumer response, image enhancement through associations, and increased leverage with trade partners such as channel intermediaries [30,31].
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Why firms do co-promotions in mature markets?

Abstract

Introduction

Section snippets

Literature

Three duopoly markets of six firms

Analysis

Discussion

Int J Ind Organ

Int J Ind Organ

Int J Ind Organ

J Bus Res

J Bus Res

J Bus Res

Int J Res Mark

Commodity bundling and the burden of monopoly

Q J Econ

Symbiotic marketing

Harvard Bus Rev

Collaborating to compete

Mark Sci

Organizing successful co-marketing alliance

J Mark

A strategic motivation for commodity bundling

J Ind Econ

Asymmetric strategic alliances: a network view

J Bus Res