The Dynamics Of Online Consumers' Response To Price Promotion

We aim to understand the attitudinal and behavior states of the online consumer-retailer relationship and its dynamics and, furthermore, to examine how consumers respond to price promotion as a function of the relationship. To do so, we build a hidden Markov model and estimate it with individual-level transaction data collected from a premier online retailer. Our quantification of transits across consumer-retailer relationship states provides unique insights. For example, price promotion can strengthen consumers' loyalty only for consumers who are at least moderately loyal whereas it is not effective at changing nonloyal consumers' attitudes toward an online retailer (i. e., from nonloyal to loyal). Unlike in the off-line market, consumers even in the strong relationship state are likely to seek more coupons as they increase their online shopping experience. The switching behavior observed even after online consumers reach the strong relationship state shows one aspect of the fierce price competition in the online market. Our results also suggest that managers of online retailers pay attention to the recent change in a consumer's buying behaviors rather than the long-term trend of the consumer's purchase behavior. For instance, an increase in recent purchase volume strengthens loyalty toward the retailer and/ or the habit of buying without a coupon for consumers in the strong relationship state. These findings have important managerial and operational implications for devising a customized marketing mix strategy.