Save-A-Buck Grocery: increasing its sales through a raffle.

Williams, Robert J. ; Reddy, Allan C. ; Holland, Phyllis G. 等

CASE DESCRIPTION

The primary subject matter of this case concerns a promotion, specifically a raffle, that can be used by any size business to increase its sales. Secondary issues examined include the specifics as to how a raffle might be conducted, and a demonstration of the proper statistical technique needed to assess the effectiveness of the raffle in increasing a firm's sales. The case has a difficulty level of three, appropriate for junior level students. The case is designed to be taught in two class hours, and is expected to require two to three hours of outside preparation by students.

CASE SYNOPSIS

Firms are constantly seeking ways to increase their sales. A raffle involving a cash prize may be an excellent technique for accomplishing this objective. A raffle might be a way to "pay" customers to buy more, and is usually appropriate for any size firm. This case shows how a simple raffle technique can be used to increase sales, and also demonstrates the type of data and the statistical technique needed to examine the effectiveness of a raffle. Students will learn the type of data needed to evaluate the raffle and how the data can be collected and tested. Further, students will be exposed to the types of questions they must ask themselves in order to properly conclude whether a raffle has been cost effective in stimulating firm sales and profits. This case is an excellent teaching tool that is appropriate for an introductory statistics course, an introductory marketing course, a promotions course, a course in marketing strategy, and business policy.

HISTORY

Save-A-Buck Grocery was a small, family-owned business located in Capital City, Florida, and was involved in the sale of various types of grocery items. Save-A-Buck had experienced rapid growth in its four years of operation, due primarily to its ability to bring a large volume of discount grocery items at very low prices to a wide range of customers. The owners, John and Myra Williams, stood by the store's slogan, "If you don't shop with us, it costs us both money." The Williams' credited their early success to the use of effective cost control, selected customer discounts, and the use of a raffle contest that seemed to have stimulated sales and served to promote the store and its low priced products. The Williams wondered if they should "fine tune" the contest to further increase sales.

Save-A-Buck opened in the late summer of 2001. To the owners' delight, sales grew rapidly, and averaged about 18-20% growth per year. By the end of its first year of operations, store sales had reached $233,000. By the second year, sales totaled $280,000, and by the end of the third year the owners reported that sales had reached approximately $329,000. To meet this growth, the store employed three full-time employees and three part-time employees. The hiring of an additional fulltime employee within the next three months was being considered. The day-to-day operations of Save-A-Buck were under the direction of Ms. Mary Mason, Myra's sister.

The owners attributed the rapid sales growth to the use of discounts to selected customers, including senior citizens and college students, and the store's delivery service to community retirement centers. Students at the local college and university, who possessed a current student ID, were allowed a 5% discount on their purchases, as were customers who were 62 years or older. Also, a cash contest was begun in the summer of 2002 for regular customers who did not qualify for other discounts. The idea for the contest came from customers who expressed an interest in a cash drawing. One customer expressed it this way; "Students get financial aid and a Save-A-Buck discount, the elderly get social security and their Save-A-Buck discount, what about the rest of us?" So far, students and senior citizens who are regular customers have not complained or seemed offended about not being eligible for the cash prize.

CUSTOMERS

During an average month, between 2000 and 2500 customers shopped at Save-A-Buck. The owners observed a great deal of diversity in the customer base, particularly with respect to occupational backgrounds and income levels. Mary Mason told the interviewer, "We serve all types of folks including college students, retirees, state employees, upper income, lower income, and no income--the last category applies to folks in local homeless shelters to which we donate quite a bit of food items on a monthly basis." Mason continued, "In fact, we are very proud of the fact that last year alone, we donated over $15,000 worth of food to the Second Harvest Food Bank--as the community supports us, we will support the community."

John wanted to gather some data on the store's customer base, and so, customers who completed and returned a short survey were granted $2 off of their next purchase. An analysis of the data revealed a great deal of diversity among the customers. Nevertheless, a few demographic findings were noteworthy. For example, the survey results indicated that the average customer visits Save-A-Buck 3.2 times per month. The majority of customers surveyed had an average income of $25,000 or less, traveled 3-4 miles to shop at Save-A-Buck, and the majority of customers had 1-2 children or grandchildren living at home. Several survey respondents did support John's contention that many customers tended to buy the majority of their canned and prepackaged grocery items at Save-A-Buck, and then proceed to the larger supermarkets to make additional purchases, especially in dairy and meat items.

MARKETING STRATEGY

When John and Myra were seeking a store location, they were careful to locate the store in a lower rent district, as cost control was of paramount importance. By and large, these neighborhoods were composed of working class families with medium to lower income levels. While Save-A-Buck's location was within one mile of two large grocery chains, Winn-Dixie and Food Lion, John saw this is an opportunity rather than a threat. Since Save-A-Buck was located on the edge of town, and between the town and the two large grocery chains, John felt that customers would first stop at Save-A-Buck to pick up bargains and then proceed to the larger chain stores. John's strategy hinged upon his ability to locate low-priced suppliers and to keep his store prices 20-30% lower than his competitors. Also, John decided to stress the sale of dry goods and prepackaged meat products, and to limit the sale of dairy items and fresh meats.

Within a year of opening, Save-A-Buck, which had originally sold a limited line of health foods and health and beauty aids, was evolving into a limited line general grocery store. John's marketing vision, which seemed to be working; customers were buying about 75% of their grocery items at Save-A-Buck, and they were proceeding to the large chain stores to purchase dairy and meat items.

MANAGEMENT AND GROWTH ISSUES

While Save-A-Buck offered far more items than a typical convenience store, it was also fairly small in size, occupying about 2800 square feet. An additional 1250 square feet was available for storage. The storage space was crucial to the store's success, as it allowed John to purchase grocery items in bulk from suppliers in Alabama, Florida, Georgia, and Mississippi. By buying nonperishable grocery items in large quantities, Save-A-Buck maintained low inventory costs. After careful analysis of sales and purchases records, John determined that Save-A-Buck's gross profit margin was about 33% of sales.

John and Myra both realized that the store was too small to allow room for much more sales growth, however, given the low rent area and the excellent location, they were reluctant to move at this time. John's landlord admitted how surprised he was to see such sales volume coming from such a small store. The landlord quipped "It's awesome to watch the people coming in and out of there, especially on a Saturday--it reminds me of holding a carnival in a phone booth." Fearful that Save-A-Buck might seek a more spacious location, the landlord offered John a four year lease with no rent increase during this time. Both John and his landlord seemed happy to continue their business association.

PROMOTION

The owners had used a number of promotional techniques. Radio ads were placed on local station WBZE ("The Breeze"). Few people reported hearing the ads so they were discontinued early in 2002. Ads were also placed in the Thrifty Nickel (a free newspaper containing some news and lots of ads). These were also discontinued in 2002, as the cost ($1,274 per year) did not justify the benefits (few people reported seeing the ad). The only advertising the company did by summer 2002 was to place flyers in the six local Goodwill Stores. The Goodwill stores manager was also a customer of Save-A-Buck. These flyers cost $20 per month and the owners believed these were effective. This method of promoting the store had been used for about two years.

THE EXPERIMENT

For some time, John had considered ways to increase total store sales by increasing the average customer "basket number", or the amount the average customer buys per trip to the store. John was aware that other stores in the area had used various marketing techniques to boost sales, including double and triple coupon savings, special sales on certain items, and "buy one, get one free" specials. One store even offered extra low prices to customers who bagged their own groceries.

One afternoon, John came up with a simple idea; why not pay people to buy more from Save-A-Buck? With this notion, the idea of a contest was born. John checked other stores, and there seemed to be no stores in the area that gave away cash to a lucky contest winner. John recalled that several customers had asked about such a contest. From this idea, a monthly cash drawing was begun in order to give approximately 1,000 customers, who fail to qualify for store discounts, an opportunity to win cash prizes. By offering a monthly cash prize, John was hopeful the store would be able to increase the size of the average basket, and, therefore, total monthly sales.

The contest rules were simple: for a minimum purchase of $10 a customer received one ticket that was entered into a drawing box. For each additional $10 purchase the customer received an additional ticket. A purchase of $40, for example, entitled a customer to 4 tickets. The larger the purchase, the greater the customer's chance to win. At the end of the month, one winning ticket was drawn, and all non-winning tickets were discarded.

Between summer 2002 and summer 2003, the cash prize was $25 per month. The prize was raised to $100 in the summer of 2003, and the effects on the basket number were statistically examined. Store employees quickly noticed that many customers would purchase an additional item or two if their total purchase was close to the next $10 increment in order to obtain an additional ticket. Also, many customers made an effort to purchase the $10 minimum in order to obtain at least one ticket.

THE RESULTS

Data for the basket measure and for total monthly sales were obtained from state sales tax records. It was observed that both the average basket and average monthly sales could be determined for 44 weeks before the contest began, for 49 weeks in which the cash prize was $25, and for the past 64 weeks in which the prize was raised to $100. John decided to compare both the average basket size and average monthly sales during the three periods of (1) no contest, (2) $25 prize, and (3) $100 prize. As a business professor with ample statistical training, John felt he would be able to test the effect of the contest on the basket size. Analysis of variance (ANOVA) was used and the results were analyzed.

The basket means and average monthly sales for the three periods are presented in Tables 1 and 2 respectively. The results John obtained from the ANOVA analyses appear in Tables 3 and 4.

The results seemed to support the conclusion that the addition of the contest has increased both the average basket size and average monthly sales. With no contest, customers bought, on average, $10.29. With a $25 cash prize, the basket increased to $10.48. Once the prize was set at $100, the average basket increased to $11.65, and statistically, this basket size was significantly larger than the other two baskets.

While conducting the experiment, John was careful not to change any other factors that might bias the results. John estimated that most of the increase in basket size was due to the contest. He conservatively estimated that about two-thirds of the basket increase was due to the increase in the cash prize to $100.

WHAT NEXT?

John had planned to increase the cash prize in the fall of 2005 in an effort to further increase sales. Both Myra and the store manager, Mary, were worried about giving away too much money and conveyed their concerns to John. In response, John informed them that he would give it further thought, therefore, no decision about whether to increase the prize, and, if so, by what amount, has yet been made.

QUESTIONS

1. What are the benefits of a raffle over other types of promotion available to Save-A-Buck?

2. Assume that an estimated 1000 customers per month are eligible to participate in the contest and that 2/3 of the increase in the basket size is due to the contest. Also, assume Save-A-Buck's gross profit margin is 33% of sales. Is John right, has Save-A-Buck made money by giving away money?

3. What can you say the effect was on the basket size between offering a $25 prize and offering no prize, i.e., is there statistical evidence that the $25 prize actually increased the basket?

4. If John had increased the store's advertising during the contest period, what impact might this have had on interpretation of the results?

5. Are there any other factors that are not controlled for in this experiment? Any alternate explanation for the increase? Does John take these into account?

6. In Table 1, what does the minimum basket number of $10.17 during the $100 prize period suggest about customer behavior?

7. Did John use the correct statistical technique to test the effectiveness of the contest?

8. In tables 3 and 4, what is meant by the expression "Comparisons between means are significant at the .05 level?"

9. At the end of the case, John is planning to give away more money. Mary and Myra object. Whom do you support and why?

REFERENCES

Inman, J. S. & L. McAlister (1993). A retailer promotion policy model considering promotion signal sensitivity. Marketing Science, 12(4), 339-356.

Kumar, V., V. Madan & S. S. Srinivasan (2004). Price discounts or coupon promotions: Does it matter? Journal of Business Research, 57(9), 933-941.

Kumar, V. & A. Pereira (1997). Assessing the competitive impact of type, timing, frequency, and magnitude of retail promotions. Journal of Business Research, 40(1), 1-13.

Leone, R. P. & S. S. Srinivasan (1996). Coupon face value: its impact on brand sales, coupon redemptions, and brand profitability. Journal of Retailing, 72(3), 273-290.

Neslin, S. A. & R. W. Shoemaker (1983). A model for evaluating the profitability of coupon promotions. Marketing Science, 2(4), 361-380.

Robert J. Williams, Valdosta State University

Allan C. Reddy, Valdosta State University

Phyllis G. Holland, Valdosta State University

Table 1: Average Basket Purchase per Customer

 Contest prize

 $0 $25 $100
 (n=44) (n=49) (n=64)
Mean $10.29 $10.48 $11.65
Std. Dev. 1.27 1.18 0.98
Minimum 8.19 8.55 10.17
Maximum 15.16 14.37 14.06

Table 2: Average Monthly Sales

 Contest prize

 $0 $25 $100
 (n=44) (n=49) (n=64)
Mean $9,814 $11,004 $11,846
Std. Dev. 2,128 1,681 2,349
Minimum 4,725 7,875 5,913
Maximum 15,412 15,336 18,337

Table 3: ANOVA Results for Average Basket

Dependent Variable: Basket
Model F value 23.80 Pr > F .0001
R-square .24

T-tests (LSD) for Variable: Basket

Contest Difference
Comparison Between Means

100 - 25 1.17 ***
100 - 0 1.36 ***
 25 - 0 0.19

Note--Comparisons significant at the .05 level are indicated by ***.

Table 4: ANOVA Results for Average Monthly Sales

Dependent Variable: Monthly Sales
Model F value 12.23 Pr > F .0001
R-square .14

T-tests (LSD) for Variable: Monthly Sales

Contest Difference
Comparison Between Means

100 - 25 $ 842 ***
100 - 0 2,032 ***
 25 - 0 1,190 ***

Note--Comparisons significant at the .05 level are indicated by ***.