A Coupon can make the difference between a Customer buying your Product and your Competitor’s Product. Sometimes Coupons can make the difference between a Customer buying a Product at all.
Coupons are used as a type of Price Discrimination. As only price-conscious Customers are likely to spend the time to claim the savings, they enabling sellers to offer a lower price only to those Customers who would otherwise go elsewhere. Sellers can use Demographics to target Customers most likely to change their purchase behavior.
Spacely Sprockets has about a 50% share of the Sprockets market. He decides to send coupons to randomly selected potential new Customers based upon dubious demographic data. He wishes to test five different coupon strategies and compare the results to his existing sales:
- 100% of existing Cogswell Cogs Customers get a $10 coupon
- 40% of new Customers get a $20 coupon (Group A)
- 30% of new Customers get a $30 coupon (Group B)
- 20% of new Customers get a $40 coupon (Group C)
- 10% of new Customers get a $50 coupon (Group D)
Spacely Sprockets and Cogswell Cogs are nearly identical Products. Each Competitor attacts about a 50% Market Share, although about 2.5% of Customers abstain from buying either Product.
The Customers who do not purchase Spacely Sprockets are divided randomly into Demographic Groups: A, B, C, and D. These groups are used to determine the value of the Coupon they are to receive. The groups are as follow:
- Group A: 40% of Customers each get a $20 Coupon
- Group B: 30% of Customers each get a $30 Coupon
- Group C: 20% of Customers each get a $40 Coupon
- Group D: 10% of Customers each get a $50 Coupon
Target the other Demographics (B, C, and D) by sending them Coupons worth $30, $40, and $50 respectively. In addition, test sending out $10 Coupons to all Cogswell Cogs and ‘No Sale’ Customers regardless of their (random) Demographic grouping.
The redemption Cost of the Coupons from the new Customers are deducted from the Profit of Spacely Sprocket. The results from all Coupon Strategies are then collected together and compared:
- Original Market: No Coupons
- All Customers: 100% of Customers get a $10 Coupon
- Group A: 40% of Customers get a $20 Coupon
- Group B: 30% of Customers get a $30 Coupon
- Group C: 20% of Customers get a $40 Coupon
- Group D: 10% of Customers get a $50 Coupon