Management and Effects of In-Store Promotional Displays

Abstract

Problem definition: We examine a brick-and-mortar retailer's choice of which product to include in a promotional display (e.g., an "endcap" display). The display provides a visibility advantage to both the featured product and its category, but it also has consequences for customer traffic and substitution. Academic / practical relevance: While there has been considerable academic interest in the assortment planning problem (which products to offer?) and in the shelf-space allocation problem (how much space to devote to each product?), little attention has been paid to the problem of where to place products in the store. Promotional display choice can serve as a powerful demand-shaping lever for retailers. A good understanding of this problem can also facilitate a retailer's negotiations with manufacturers. Methodology: We develop analytical insights using a problem formulation based on a nested multinomial logit (NMNL) model of customer choice. Results: When choosing a promotional product from a fixed category, the only possible optimal choices for promotional display lie along an "efficient set" drawn in terms of product popularities and margins. The optimal choice along the frontier depends on a quantity we call "aisle attractiveness" that depends on several category-level parameters. The value of the display to a category pivots on whether the display's role is primarily to expand demand for the category or to shape substitution within the category. Managerial implications: Our work provides guidance for how retailers can use and value promotional displays effectively. We highlight the importance of considering externalities of a display decision on store traffic and demand for other products.

Keywords: retail operations, assortment planning, promotional displays, choice modeling, nested multinomial logit model