Sweepstakes and contests are some of the most frequently used promotional tools. Consumers participating in sweepstakes or contests have an opportunity to win prizes through a random draw. In this article, the authors examine some commonly used sweepstakes formats and provide insights into how consumer valuations depend on the number of winners, the number of levels of prizes, and the difference in the awards between the levels (reward spread). The authors first apply cumulative prospect theory to investigate how consumers value different sweepstakes. They analyse the optimal sweepstakes design that maximizes consumers’ anticipated value of participation. Then, they present experimental studies that examine consumer preferences for different types of sweepstakes. The studies offer empirical validation for the key theoretical results. The analysis shows that the sweepstakes reward structure should be based on three factors: the promotional objectives, the risk aversion of the customers, and the level of subadditivity.
The results prescribe that a firm should begin by setting an objective either to attract switchers or to target current users. If the current users are risk neutral, the consumer value-maximizing award is a single grand prize (“winner-take-all”). If the current users are risk averse, then the award should consist of multiple “large” prizes. When the objective is to target current users, fewer prizes should be awarded than when the targets are switchers. If the non–current user segment is risk neutral with respect to gains but sufficiently loss averse, the prescribed reward structure is a single grand prize, but it is recommended also to include several small prizes that ideally should be close to the customers’ opportunity cost. If the nonloyal customers are risk averse in gain and loss averse, the best prize allocation is to have both multiple large prizes and several small prizes. Another factor that affects the value-maximizing reward structure is the degree of subadditivity. The authors provide some evidence that creating an illusion of control by increasing the effort required to participate may be a fruitful avenue for further research.
Ajay Kalra is Professor of Management in the Jesse H. Jones Graduate School of Business at Rice University. He received his undergraduate degree in Economics from the Birla Institute of Technology and Science in Birla Institute of Technology and Science in Pilani, India, and his PhD in Marketing from Duke University. His current research interests focus on the field of decision making and behavioural economics. His research has appeared in Marketing Science, Management Science, Journal of Marketing Research, and Journal of Advertising.
Mengze Shi is Associate Professor of Marketing in the Rotman School of Management at the University of Toronto. He received his PhD in Marketing from the Graduate School of Industrial Administration at Carnegie Mellon University. His current research interests focus on a range of sales promotional tools, including loyalty programs, sweepstakes, and word-of-mouth referral programs. Most of his research has appeared in Marketing Science and Management Science.
Journal of Marketing Research, Volume 47, Number 2, April 2010
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