The Mystery of Mystery Promotion
Marketing Department; Faculty Advisers: Raghuram Iyengar, Jehoshua Eliashberg
Many retailers, such as Kohl’s and Bloomingdale’s, are frequently employing an innovative form of promotions, which we term “mystery promotions.” In this type of promotion, a set of different discounts with certain probabilities is provided instead of a deterministic discount. In this project, we aim to understand the rationale behind mystery promotions and help retailers design them better with the objective of improving profits.
Using a theoretical framework, we first provide a rationale for why mystery promotion can be profitable for retailers. Then, we consider two scenarios: 1) if retailers know how heterogeneous their customers are in terms of valuing the product, we propose an optimization framework to maximize profit in light of such heterogeneity; 2) if retailers do not have such knowledge, we show that mystery promotions can still be profitable by proposing an easy-to-implement universal promotion strategy, which generates higher expected profits than deterministic promotion. We use lab experiments to validate our theoretical propositions, illustrate how to empirically estimate the level of customer heterogeneity, and design optimal mystery promotion strategies