Which Categories Should Direct Marketers Feature for Which Customers When Using Targeted Promotions?

We present a decision-support tool that assists direct marketers in selecting subsets of promising categories from the large assortment they typically offer for inclusion in targeted promotions. The proposed analytical approach combines conventional wisdom of market basket analysis in a novel two-stage procedure. For deriving segment-specific promotions at the product category level, this procedure takes both interdependencies in purchase behaviour across categories and customer heterogeneity with respect to cross-category effects in response to marketing actions into account. The resulting recommendations are empirically evaluated vis-à-vis alternative approaches in a controlled field experiment conducted in cooperation with a major online grocery retailer.