Maximizing profit of a food retailing chain by targeting and promoting valuable customers using Loyalty Card and Scanner Data

In this paper, we set up a House of Profit Model, an approach of maximizing profit of a food retailing chain by targeting and promoting valuable customers. Our model combines
• segmentation analysis of households using Loyalty Card and Scanner Data,
• price and promotion elasticity analysis,
• simulation of effects of pricing and promotion,
• price and promotion optimization to maximize profit.These components are well-known in the literature and each of them has received considerable independent study. However, in this study we combine each of these components into one consistent, application-orientated model. We then demonstrate using panel data that the combination has a synergic effect on the efficiency of estimation and the maximization of profit (e.g., price and promotion elasticity estimation is improved by conducting it within market segments rather than across an entire hetereogeneous population). These estimates are further improved by incorporating “pass through”—a functional relationship between a retailer’s unit prices and unit costs.