The way we do business continues to change with technology. Coupons have been traditionally used as a means of price discrimination. For example, people who think it is worth the extra effort to cut coupons out of newspapers take advantage of price savings while those who are less sensitive to price don't bother with the coupons.
In this article about coupon web sites, the author discusses how the latest technology is impacting the way coupons are used. In the example previously mentioned about cutting a coupon out of the newspaper, a consumer must subscribe to the newspaper and also take the extra time to cut the coupon out. But now in the day of sophisticated phone apps, consumers have the capability of finding and redeeming coupons very easily. The author of the article contends that the whole purpose behind coupons are beginning to be lost with web sites and phone apps, since the deals that are being offered are so easily accessible.
In order for coupons to still be used for price discrimination, it will be important in the future for companies to require a little bit more out of their customers than simply Googling and downloading phone apps that give nearly effortless access to coupons.
12 comments:
I feel that one important point that the author made is that with all of this couponing and so forth one aspect that is diminishing is brand loyalty of consumers. Essentially consumers don’t care who makes a razor, consumers simply want a functioning razor for the lowest price possible. Due to this consumers are not being acquired by companies or brands, consumers are simply price conscience because of the many substitutes that are available.
I do agree with what you're saying Spencer to a degree, but I don't think the author is implying that consumers don't care who makes what. The focus of the article seems more to be on creating brand loyalty through referral type programs. Also, I don't think consumers choose the lowest priced product simply because there are more substitutes (maybe that's not what you meant, but that's how I understood your comment).
I am quite loyal to the Gillette brand when it comes to razors, and I am willing to pay more for those than any of the others because of that brand loyalty. It would take a referral from somebody else for me to want to buy a different brand of razor. I wouldn't just switch for price. That is why I think the author has a great idea with the referrals.
I'm a (modest) clipper of coupons for brand name products my family already uses.
As an economist though, I think Xavier is right. Price discrimination, through coupons, needs to require some fixed cost to establish (what is known as a) separating equilibrium. I wonder how much internet coupons have stepped away from that.
Consumers are, for the most part, generally simply concerned with the final sales price of a product. It sounds good to people to hear themselves say they are into "couponing" and saving money, but it requires a lot of effort, and TIME. Each persons opportunity costs of spending the time required to be an effective couponer, is decisively unique.
There is a reality show dedicated soley to the lives of extreme couponers. It sounds good, but so does saving the rain forest.
It is my assertion that companies will struggle mightily if they require "more" out of their consumers, as consumers generally have many other options readily available to them. A lower price for a similar product will be hard to beat.
The article mentions that a company will sell to 2,500 people by pricing an item at $2.50, but it also wants to get the other 1,000 who are willing to pay $2.00 for the product, so a coupon is offered. I agree that the purpose and design of coupons was to generate more customers. However, I can see now that coupons are considered "on sale" items. I know that whenever I purchase something online, I search for a promo code or coupon code of some sort. It is so easy to find coupons now that it appears price discrimination has transformed into price competition between companies. It will be interesting to see the future of price discrimination with the continual evolution of technology.
I find this topic to be fun because my wife is also a modest coupon clipper. Price discrimination has become more evident in couponing due to the shear volume of couponers and the volume of ways to get coupons. People willing to pay higher prices must have higher perceived value for the product which leaves them willing to spend maybe less time worring about the cost of the product. I also agree with Xavier that companies may start making it a little more difficult to gain access to better value in the future.
DR. Tufte
I am curious about this "Separating the Equilibrium". Is that when one group of people has a perceived value on a product that is higher priced than do others? Which in return means that other people see no extra value and are willing to pay less than or a discounted price for a product with a different name?
Response to the first comment from Gubler Family:
I think a lot of people (myself included) may underestimate the opportunity cost of using coupons.
I mean, what is your opportunity cost? Choosing round numbers, if you get paid $60K, that's $30/hr, which is 50 cents a minute. And you'd need to count the time both clipping, organizing, reading, and so on.
Reply to the second comment from Gubler Family.
Separating equilibrium is something that is in advanced ManEc texts, but not usually in basic ManEc books like the one used in this class. Here's an example. You can also look at pp. 366-9 in your text, for a brief introduction.
Broadly, the idea is that there is one equilibrium price, but the seller thinks they might be able to price discriminate, but they can't do it directly. So you make some sort of offer to your buyers so that their actions reveal who is in which group. Basically, your single equilibrium separates into two (or more).
Xavier, yes I agree with what you are saying regarding the authors ideas to reward referrals. Referral incentives are a great way to establish a customer base and create that loyalty that companies are wanting. What I meant by my earlier comment regarding a diminishing brand loyalty due to coupons is because the items that are being sold using coupons have a substitute. We know that when two items are substitutes a rise in the price of good causes a rise the demand for a substitute of that good. And of course the reverse is true, that a drop in the price of a good will lower the demand for the substitute of that good. In every market there are always going to be consumers who are brand loyal (just like you for Gillette), but that brand loyalty does not dominate the market of substitutes.
Coupon Sites
I find it interesting that large companies are making it so easy to purchase their product at little or no cost in order to gain loyalty. My question is does coupons really increase brand loyalty?
My wife is a big coupon clipper and over the last few months has realized that purchasing multiple newspapers is no longer cost effective. This is based on the cost of the newspapers and the time to clip all of the coupons and organize them. Instead, now she just gets on the coupon website, prints out the coupons that are great deals and purchases the item at the store with little time and money spent. For example, a couple of weeks ago she printed a $5 off coupon from the target site, and used a $5 off coupon on her cell phone to purchase, at Target, a $12 transformer toy for free. The store had the item on sale for $9.99, one coupon took the price to $4.99, and the phone coupon took the price to free, and no my wife is not brand loyal. Technology has made couponing very easy. I would imagine that companies are looking to alternative methods to gain customer loyalty.
-1 on Ethan for a grammatical mistake.
There actually is some stuff out in the popular business media about how groupon-like deals are not all they're cracked up to be for the firms employing the service.
I actually think there's a big pitfall here for a manager that doesn't understand their marginal costs. I see this a lot around town. For example, think about a place like Taco Bell that will replace a defective item you ordered, even though their margin on most items is perhaps a quarter or so. For a low margin operation, this suggests that they might wipe out the profit on 10-20 items with one goof-up. I can't see that making sense for many operations.
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