The Allocation of Consumer Incentives to Meet Simultaneous Sales Quotas: An Application to U.S. Army Recruiting

Consumer incentives often have a dual role: to expand the market and to redistribute the market so as to meet sales targets for a range of products. The proper allocation of incentives must recognize and deal with the competitive and "cannibalizing" effects operating among product classes. The presence of environmental factors, scale economies, and cost per unit for each of the candidate incentive types also must be accounted for. This paper develops and illustrates an analytical approach designed to improve the allocation of consumer incentives where sales targets are exogenously set. The model generates a system of simultaneous behavioral equations, a portion of which is included to reflect attempted cost minimizing behavior. The model is applied to FY81-FY86 data from the U.S. Army Recruiting Command, which allocated over $1 billion for special incentives to selected recruits. The incentives consist of enlistment bonuses and educational benefits offered to quality recruits who select critical occupational specialties. The sales targets are enlistment quotas for each of the occupational specialties that must be simultaneously satisfied. The Army's goal is to meet these quotas, in a postulated recruiting environment, at minimum total incentive expenditure. Results suggest that the Army could improve the cost-effectiveness of its recruiting effort through a reallocation of the incentives it offers to recruits. Misallocation during the FY81-FY86 period is estimated to have cost the Army approximately 3.5% of its total incentives expended in infantry recruiting recruiting.