The Optimal Couponing Strategy and Product Line Design under Individual Marketing
Author
Abstract
The purpose of this paper is to analyze the effect of issuing a coupon attached to a low-end product at the retail level on the manufacturer's profits and its product line design. The manufacturer can choose to issue a mass coupon to all consumers, or an individual coupon targeted at low-valuation consumers. The mass coupon can help alleviate the cannibalization problem in the product line but its effect is limited by the magnitude of the redemption cost of the high-valuation consumers. The individual coupon serves to extract the surplus of the high segment at the expense of mistargeting.
Manufacturers could segment consumers and extract much consumer surplus to increase their profits by issuing coupons. With the development of information technology and the possibility of mass customization, manufacturers could provide consumers customization goods and service successfully. And through the data-mining, they could target specific segments. Rossi Robert and Greg (1996) show that designing the optimal face value of individual coupon by the record of consumers' purchase history is more profitable than issuing the blanket couponing for manufacturer. But if the target ability isn't perfect, it may result in the loss of consumers and profit (Chen et al., 2001). Thus, we will provide a more clear relation of the optimal couponing strategy and product line design under individual marketing.
Assuming high-valuation consumers incur a higher cost when redeeming coupons than low-valuation consumers, we find the following results: (1) When the redemption cost of the high segment is high enough, the mass coupon allows the firm to implement perfect price discrimination, thus setting the prices and the quality levels of products at the highest possible levels; (2) Unlike the mass coupon, the value of which may equal the redemption cost of the high segment, the optimal value of the individual coupon always increases with the quality level of the low-end product; (3) In a non-integrated channel, the higher the redemption cost of the high segment, the more the mass retail coupon helps alleviate the cannibalization problem and thus the retailer's incentive problems, which in turn increases the manufacturer's profits until the integrated profits can be achieved; (4) If the consumers' redemption cost is lower or the retailer's targetability is sufficiently high, the manufacturer is better to induce the retailer to issue the individual coupon. (5) The individual coupon alleviates the retailer's incentive problems to a greater extent than the mass coupon does. Thus the manufacturer may prefer inducing the individual coupon to inducing the mass coupon despite the opposite is true in an integrated channel.
Key Words
Individual marketing; Product line design; Price discrimination; Coupon
