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Embedded Premium Promotion: Why It Works and How to Make It More Effective

University of Wisconsin-Madison, 4191 Grainger Hall, 975 University Avenue, Madison, Wisconsin 53706
Red McCombs School of Business, University of Texas at Austin, 1 University Station B6700, Austin, Texas 78712
narora{at}bus.wisc.edu
ty.henderson{at}mccombs.utexas.edu

In this paper we define an embedded premium (EP) as an enhancement that involves a social cause added on to a product or service. We characterize EP as a sales promotion strategy and juxtapose it with traditional approaches, such as discounts and rebates. Across three experiments, using a nationwide Internet panel and employing stated measures and model-based inference, we find that at low denominations EP is more effective than an equivalent price discount. We describe how an EP’s social association may influence consumer choice quite differently than price promotions and, contrary to the asymmetric price promotion effect documented in the promotions literature, we find that EP benefits an unknown brand more than a known brand. Our hierarchical Bayes approach uncovers heterogeneity in EP effectiveness that can be explained by affinity toward the focal charity, personal motivations, and demographic markers. An identifiable segment of individuals prefer the "other" over "self," suggesting possible EP optimization and segmentation strategies. Two such strategies, customization and coverage, are empirically tested, and the former is shown to be very effective. Our findings have broad implications for brand managers with regard to resource allocation and EP program return on investment (ROI), as well as important social welfare implications.

Key Words: embedded premium; sales promotion; consumer choice; hierarchical Bayes; ROI; cause-related marketing
History: Received: January 17, 2006;

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