Personalized promotion a potential "win-win" for retailers, consumers
Personalized promotion a potential "win-win" for retailers, consumers
Date: 2019-9-29

Personalized promotion a potential "win-win" for retailers, consumers

Access to consumer data from online-to-offline service platforms affords retailers a distinct opportunity to develop uniquely tailored promotional strategies that can increase sales, according to a study co-hosted by the University of Illinois (UI).

The study examines the economic value of price discounts via a unique field experiment in China with a leading online-to-offline platform that counts more than 50 million active users. The researchers implemented a personalized promotion algorithm with nine big-box retail stores that utilized an online-to-offline platform and compared the results against two stores that didn't implement personalized promotion but still maintained a regular mass-promotion strategy.
They found that, when compared with the control stores, personalized promotion led to, on average, a 1.6-percent increase in the total monthly transaction amount; a 3.2-percent increase in the number of items purchased per order; and a 2.2-percent increase in the probability of a five-star rating.
"At first glance, those numbers might not seem like a lot, but in the retail industry, 2 percent is a lot," said Yuqian Xu, a professor of business administration at UI. "Given a 50 million consumer base, we found that personalized promotion translates into an additional 270 million dollars in revenue per year. While generating that additional revenue, it also decreases regular promotion costs by almost 0.25 dollars per consumer per month."
"We also found that personalized promotion has limited immediate effects," she said. "The positive effects on revenue increase at first, but then decrease over time. On the other hand, the positive effects on consumer satisfaction become significant only after a sufficiently long time period - nine months or so."
The effects are greater for new consumers and less for frequent and high-value consumers, according to the study.
"The positive effects on revenue are less for consumers with high historical transaction amounts and frequency, but those effects can be offset by generating additional revenue from new consumers," Xu said. "The longer consumers are involved with the platform, the less likely their purchasing behaviors are affected by personalized promotion."
The study provides several practical implications for businesses that rely on consumers who shop through an app on their smartphone or through online-to-offline portals.
"Our main results demonstrate the personalized promotion can be a 'win-win' for both the retailer and the consumer," Xu said. "It generates more money for the retailer, and it improves overall consumer satisfaction. But it requires nine months or more for those positive effects to take hold... Since the positive effects decrease in the long run, that means that the platform and the retailer also should be aggressive about courting new customers."