VAT-free promotions boost sales – except among loyalty-programme customers

Overview

In Evaluating the impact of VAT-free promotion: the role of loyalty program membership and category characteristics, published in Marketing Letters, ESCP Business School Professor Saied Vafainia and co-authors Els Breugelmans (KU Leuven, Belgium) and Tammo H. A. Bijmolt (University of Groningen, The Netherlands) investigate the effect of VAT-free promotions on sales performance using empirical data from a large Dutch non-grocery retailer.

Why study this

In recent years, many retailers in a variety of sectors including electronic goods, home furniture and outdoor equipment, have adopted a new type of sales promotion known as value-added tax (VAT)-free promotion. The principle is that during VAT-free promotion events, which are organised once a year and last a few days, the retailer rather than the consumer pays the VAT, which translates into a substantial discount for the shopper. Although this specific type of promotion has become increasingly popular, its effectiveness in terms of sales performance has not been analysed rigorously so far.

Findings

• VAT-free promotions have a positive, significant effect on total store sales (+153%), number of buyers (+75%) and average spending (+45%).
• The increase in number of buyers (transaction effect) and spending (spending effect) is big enough to cover the store's revenue loss due to the price reduction.
• VAT-free promotions increase total sales across almost all categories of products (living room, lighting, household appliances, etc.) except kitchen.
• The effect of VAT-free promotions has a significantly lower impact on non-loyalty programme members compared to loyalty programme (LP) members.
• The positive effects for non-LP members are mainly due to an increase in the number of buyers (+260%), although average spending also increases (+84%). Overall sales are boosted by 568% for non-LP members.
• The negative effects for non-LP members come from a lower number of buyers (-49%) which is not compensated by the increase in average spending (+19%).
• A possible explanation for the lower responsiveness of LP members is that the financial benefit might be limited for their typical shopping basket and they may not like the crowdedness and long payment queues.

Key insight

VAT-free promotions positively influence store sales, but only among non-loyalty-programme shoppers.

Impact

The results challenge the common practice of retail managers to focus mainly on LP members, as non-LP members respond significantly more to VAT-free promotions. The study will help retail managers differently manage LP and non-LP member customers. Also, since there are no significant differences in effectiveness across categories of products, retailers may focus on those of highest interest, for instance those where inventories need to be emptied.

Final takeaways

“Retailers should strive for creating more awareness of the VAT-free promotions among the (potential) customer in the trade area, mainly non-LP members. Rather than using its own channels, we propose the use of various mass media communication channels (e.g., outdoor advertising, door-to-door flyers, or even local TV advertisement) to reach prospect non-LP members.”