Coupons and Slaps

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I have written about the virtues of discrimination - that is, price discrimination - here, here and here.

A friend of mine in California reminded me of this when he sent me an article bemoaning coupons. Everyone who has ever bought online has seen "enter coupon code here" on the payment page. The author argues that the very existence of that text and the coupons is a slap in the face to someone willing to pay full price today, and causes many to walk away. The author's conclusion? Kill coupons altogether, or give the same time-limited discount to all customers.

While he has the symptom right, his prescription is wrong. Coupons are a crucial way of doing price discrimination. If not, why would every supermarket and drugstore chain in North America go to the expense of printing, distributing, managing and redeeming them?

Cutting coupons (or finding them online) takes significant effort for the buyer. For some people, that shampoo is worth $5, and the effort of hunting down coupons is not worth the $0.50 saved. For others, however, the it is worth $4.50, and they would buy it only at that price, but they are willing to put in the effort to find the coupons, save them and enter them.

The coupon allows the seller to find those for whom the shampoo is worth only $4.50 and capture them, without giving up on the $5 the full-price buyer is willing to pay.

However, and this is important, the seller must not alert the $5 buyer that he could get $0.50 off at purchase time. If he does - and especially with digital coupons that appear to be a 2-minute Google search and click away - the full-price buyer is suddenly much less willing to spend the full price, and will go elsewhere to buy it (or not at all).

Coupons, and the effort involved in finding, keeping and entering them, are an important way to capture an additional market segment, even in the digital world. But just as Loblaws doesn't have a big sign at each checkout, "enter your 20% off coupons here!", checkouts should accept them without putting them in the full-price customer's face.

One solution (quoted in the article) is a separate URL to trigger the coupon. Another is to use dynamic coupons; figure out who should get a discount based on their online price comparison behaviour. There are yet more. But whatever you do, do not give up on capturing the maximum value from each and every profitable segment of customer.