With the boom of online coupon sites like Groupon, HBR takes a look at what to do if you’re a merchant to succeed when you offer one.
First, discount vouchers can facilitate price discrimination, allowing merchants to offer discounts to customers who value the merchant’s product less than ordinary customers do.
Second, discount vouchers can benefit merchants through advertising, by announcing a merchant’s existence to thousands of consumers en masse.
Our analysis shows that merchants will find discount vouchers most profitable when the population claiming vouchers differs greatly from the merchant’s typical clientele. We explore two areas of difference: either voucher users must be more price-sensitive than the population as a whole, or they must be particularly unfamiliar with a participating merchant’s services.
Regardless of consumer demographics, vouchers are more likely to be profitable for merchants with low marginal costs (who can better accommodate a large discount) and for patient merchants (who place higher value on consumers’ possible future return visits).
Looking at merchants’ recent use of discount vouchers, we are struck by how few merchants measure the effects of discount vouchers. If a merchant intends its discount vouchers to attract consumers who return for future visits (paying full price forevermore), then that merchant should have a plan for assessing whether voucher customers return — if not a customer loyalty program, then cross-checking of credit card receipts. Likewise, merchants intending discount vouchers to bring in entirely new customers need to check whether that is actually happening — again, credit card data makes such analysis possible.