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5/15/2006

You can't have one without the other: Sale-priced bacon often sells more eggs

Retailers have long suspected that consumers are more likely to buy two products that complement one another in the same shopping trip when at least one is being promoted. A new marketing study shows that in the case of bacon and eggs, if the price of bacon is reduced, retailers see an increase in sales of both bacon and eggs.

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When it comes to grocery shopping, if consumers purchase one type of product, they're likely to purchase another product that complements it. Take bacon and eggs, for example. Studies by marketing experts show that customers who buy bacon usually do purchase eggs as well (and vice versa), but they also show that promoting bacon is more profitable to the retailer than promoting eggs.

"Increases in egg sales can occur because of a price cut on bacon," said Seethu Seetharaman, an associate professor of management at Rice University's Jesse H. Jones Graduate School of Management.

"And, if customers decide to stockpile on bacon, they also will purchase more eggs. A price reduction on eggs, however, may not increase bacon sales."

Seetharaman theorized that because bacon is more expensive than eggs, a price reduction in bacon might be more attractive to customers. Additionally, because eggs are a more versatile product than bacon, a price cut on eggs does not necessarily have as big an impact on the purchase of bacon.

While price reductions on bacon can increase egg sales, other types of marketing instruments such as newspaper ads and store displays may produce different results. For example, Seetharaman and his research colleagues found that print ads featuring bacon appear to have the same impact on egg sales as reduced prices on bacon. On the other hand, store displays on bacon cause demand for that product to go up, while egg demand goes down.

"We think the reason may be that when consumers see a newspaper ad featuring a price reduction in bacon, they will include bacon and eggs in their shopping budget before leaving for the store," explained Seetharaman.

"On the other hand, if they learn of the bacon price reduction from a store display after they have budgeted for their groceries, they might make an unplanned purchase of bacon and not have enough money to also purchase eggs during the same shopping trip."

In a working research paper titled "A Cross-Category Model of Households' Incidence and Quantity Decisions," Rice's Seetharaman, Rakesh Niraj, an assistant professor of marketing at the University of Southern California, and V. Padmanabhan, a professor of marketing at INSEAD, estimate the first statistical model of consumers' cross-category purchasing behavior that explains not only the decision about whether to make a purchase, but also the number of units bought by the consumer during a purchase.  

Earlier studies employing choice data have ignored quantity outcomes. And, unlike this study which relied on consumer-level choice data, the vast majority of earlier studies relied on aggregate store-level sales data.

"Suppose aggregate sales for a brand at a store are found to double when a price promotion is offered," explained Seetharaman.

"Using store-level aggregate sales data, it is impossible to understand whether such doubling in sales is due to regular customers buying twice as much as they usually do, or if it is due to a new pool of consumers buying the product because of the sale."

Similarly, added Seetharaman, it would be impossible to tell whether two products are complements using aggregate sales data since one could not observe whether the same consumer was buying the two products during the same shopping trip.

By way of their statistical model, Seetharaman and his colleagues are able to show retailers that 23 percent of the total retail profit that is based on promoting bacon and 67 percent of the profit arising from promoting eggs are from customers stockpiling. Alternately, 40 percent of the increase in egg profits as a result of promoting bacon is due to stockpiling, and 33 percent of an increase in bacon profits from promoting eggs is due to stockpiling.

Looking at retail profits, Seetharaman and his colleagues found that they increase by close to 30 percent for a one-percent price cut on bacon, but only 8.39 percent for a one-percent price reduction on eggs. A one-percent price cut on bacon represents almost a 49-percent profit gain for bacon and a 3.25-percent profit for eggs. A one-percent price cut on eggs translates into a 17.85-percent profit for eggs and a 1.33-percent profit for bacon.

According to the researchers, these differences are very significant for fast-moving product categories, such as bacon and eggs, where product volume movements and the profits from those products for retailers in a given week are substantial.

Seetharaman's work in applied econometrics, discrete choice models and scanner data analyses and his research on consumer packaged goods, the pharmaceutical, gasoline and direct-marketing industries have been published in the Journal of Marketing Research, Marketing Science, Quantitative Marketing and Economics, Marketing Letters, Review of Marketing Science, the International Journal of Research in Marketing, Advances in Econometrics and the Journal of Business and Economic Statistics.

A graduate of IIT, Madras, India, and the University of Utah, where he received his bachelor's degree in chemical engineering and a master's in chemical engineering, respectively, Seetharaman holds a doctorate in management from Cornell University.

For more information, contact Seetharaman at seethu@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu.