Coupon face value: Its impact on coupon redemptions, brand sales, and brand profitability

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  • Coupon Face Value: Its Impact on Coupon Redemptions, Brand Sales, and Brand Profitability

    ROBERT P. LEONE Ohio State University

    SRlNl S. SRINIVASAN Drexel University

    Although much resecwch has exczmined the impact of coupor~s on redemption rates, incremented sales. and marker Jhare, only ct few studies have addressed the impact of coupons on bmndprojituhility. One possible reason is luck of reudily trwilable profitrrbility data In the absence of such dutn, researcher.s have used munqerictl judgments (Neslin cmd Shormuker, 1983) and experiments (Chapman. 1986) to inveestigclte the profitability of roupons. We propose an integrative framework for evcduczting the impcrct

    of coupon ,filce v&e on brand profitability and implement it by using readily ctvcrilrble sccmner data. The research reveals that when N manufacturer optimizes the market-level profitrzbility from u coupon prognrm, projt for individual chains in the market could be suboptimal.

    INTRODUCTION

    Coupon promotions continue to be among the most popular types of consumer promotions for manufacturers. Donnelley Marketing Inc. (1995) reports that about 327 billion coupons were issued in 1994 and that the average face value of coupons issued by manufacturers increased by 7% in that year. Also, Nielsen Clearing House (1993) reports that more than 75% of households use coupons in some product category. Past research on coupon promo- tions has investigated redemption rates and redemption patterns (Inman and McAlister, 1994; Reibstein and Traver, 1982), profiles consumers redeeming coupons (Neslin and Clarke, 1987; Teel, Williams, and Bearden, 1980), the impact of coupons on market share (Neslin, 1990), and the profitability of coupon promotions (Chapman, 1986; Klein, 1981; Neslin and Shoemaker, 1983).

    To calculate the profitability of coupon promotion programs, we need to understand their costs and benefits. On the benefits side coupons traditionally are viewed as devices used to price discriminate between consumers with different price elasticities (Narasimhan, 1984).

    Robert P. Leone, Ohio State University, Department of Marketing. Columbus, OH 43210. Srini S. Srinivasan, Drexel University, Department of Marketing, Philadelphia, PA 19104.

    Journal of Retailing, Volume 72(3), pp. 273-289, ISSN: 0022-4359 Copyright Q 1996 by New York University. All rights of reproduction in any form reserved.

    273

  • 274 Journal of Retailing Vol. 72, No. 3 1996

    With a regular shelf price cut, every shopper can take advantage of the reduced price. How- ever, with coupon promotions, only consumers who spend the time and effort to redeem coupons can take advantage of the reduced price. Studies by Bawa and Shoemaker (1987) and Srinivasan, Leone and Mulhem (1995) indicate that coupons not only have redemptive value, but also can have advertisement value to some consumers. On the cost side, one of the major costs of a coupon program is the value of the coupons redeemed. If only consum- ers who would have bought the promoted brand anyway redeem coupons, then coupon redemptions would always result in lower profitability.

    Profitability of the couponing operation depends on both the incremental sales and the redemption rate. We believe the question of whether coupon promotions are profitable is too broad to have a single answer. For some brands, in some markets, dropping coupons in some particular range of face values might be profitable whereas dropping coupons with face values outside that range may not be profitable. For some other brands, in some mar- kets, couponing may not be profitable at all.

    Unlike data on brand sales and coupon redemption rates, data on coupon profitability are difficult to obtain. Even brand managers do not have good methods for computing the overall profitability of coupon promotion programs (Neslin and Shoemaker, 1983). Further, man- ufacturers are reluctant to disclose profitability data. It is therefore no surprise that data on the profitability of individual coupon drops are unavailable for studying the effect of coupon characteristics (such as face value and method of distribution) on the profitability of coupon promotion. To overcome that handicap, the few researchers who have investigated the impact of coupons on brand profitability have taken one of two approaches, experimental (Klein, 1981; Chapman, 1986) or judgmental (Neslin and Shoemaker, 1983). Those using an experimental approach conduct coupon experiments comparing sales in a control cell with sales in experimental cells to arrive at incremental sales (and profitability). Such exper- iments indicate that coupons indeed have a substantial impact on brand sales. Researchers using managerial judgment develop analytical models to calculate coupon profitability and elicit responses from experienced executives to estimate model parameters. The managerial judgments indicate that coupons normal1 y do not accelerate purchases (similar findings have been reported by Neslin, Henderson and Quelch, 1985) and that couponing operations differ widely in profitability depending on the product markets considered.

    In the tradition of previous research (Blattberg and Wisniewski, 1989; Davis, Inman and McAlister, 1992), our study addresses the short-term impact of promotions on brand per- formance. We extend past research by integrating the various subcomponents of brand sales and redemption rates to understand the impact of promotions on brand profitability. One purpose of our research is to develop a framework to aid managers in estimating the prof- itability of coupon promotions from available scanner data. In this paper we investigate the impact of FSI coupons that are not targeted to any particular segment of consumers but are sent through mass media. The proposed framework is unique in two ways: First, because of the lack of coupon profitability data, we use scanner data to investigate the underlying profitability of the couponing operation. Second, we integrate the sales response models and coupon redemption model to arrive at the impact of coupons on brand profitability. The sec- ond purpose of our research is to investigate the impact of the manufacturers optimal mar- ket-level profit-maximizing couponing strategy on the profitability of the couponing operation for each of the chains in the market.

  • Coupon Face Value 275

    CONCEPTUAL MODEL

    Overview

    Coupon face value affects both the brand sales and the number of coupons redeemed. We develop a conceptual model that integrates the effects of coupon face value on coupon redemptions and brand sales to arrive at the profitability due to coupon promotion. The pro- posed framework has three steps:

    Step 1: Investigates the impact of coupon face value on coupon redemptions; Step 2: Investigates the impact of coupon face value on brand sales; and Step 3: Integrates coupon redemptions and brand sales to arrive at the profitability of coupon promotion.

    The overall model incorporating the three steps is shown in Figure 1

    STEP I : Coumpon Redemption Model

    As noted by Narasimhan (19X4), not all consumers in a market are equally price sensi- tive. Narasimhans research demonstrates that consumers who redeem coupons on at least some of their purchases (we refer to this segment of consumers as coupon prone or CR) are relatively more price sensitive than consumers who seldom redeem coupons (we refer to this segment of consumers as coupon-indifferent or CI).

    2 Steu J

    (Redemptive Vahe + (Ad Value) Ad Value)

    1 Step + COUpOIl

    Redemptions

    Figure 7. Overall Model

  • 276 Journal of Retailing Vol. 72, No. 3 1996

    Not all households in the CP segment will redeem coupons on every purchase occasion. The decision to redeem coupons can be modeled as a function of the costs and benefits of using coupons (for a detailed discussion of those costs and benefits, see Shimp and Kavas, 1984; Narasimhan, 1984). A fraction of sales to the CP segment will be made with coupons, depending on factors like face value of the coupon, method of distribution and number of coupons distributed. In Step 1 we investigate the proportion of sales of brand i to the CP segment that are coupon sales. Ceteris paribus, the higher the fraction of sales of brand i to the CP segment that are coupon sales, the lower the profitability (as consumers redeeming coupons generate lower contribution than consumers not redeeming coupons). We model that fraction, as a function of the coupon characteristics.

    Fi = coupon sales of brand i / sales of brand i to the CP segment

    Note: both the numerator and denominator of Fi depend on the face value of the coupon drop.

    Relationship Between Fi and Coupon Redemption Rates: Traditionally, coupon redemption rates are measured as the fraction of dropped coupons that are redeemed. As the total number of coupons dropped and the actual number of coupons redeemed for each coupon drop are unavailable in the dataset provided, we use Fi to capture the impact of face value on coupon redemption. Coupon redemption rates typically range from 2% to 6%. In market 1, for a 60-cent coupon, the Fi value for brand A is .09 . Let us consider a market with 100 households and let 6.5 % of those households be classified as belonging to the CP segment. If a 60-cent coupon is dropped (approximately one coupon per household), the number of coupons redeemed (assuming a 3% redemption rate ) is three. An average cou- pon-prone household makes about two purchases during the life of the coupon and if the brands market share is about 30%, the number of coupons redeemed is 65*2.0*.3*.09 = 3.5 (which translates to a 3.5% redemption rate). Hence, the Fi estimates are realistic and are consistent with the redemption rates typically expected in a market.

    STEP 2: Modeling Sales to the CP Segment and CI Segment

    Sales to the CP Segment: As the price elasticities of consumers in the CP and CI seg- ments are likely to be different (Narasimhan, 1984), we model sales to those segments sep- arately. Consumers in the CI segment normally do not redeem coupons in the product category and hence coupons can only have advertisement value to that segment. However, coupons can have both redemptive value and advertisement value to consumers in the CP segment. Because coupons have different effects on the two segments, combining sales to the two segments and estimating the model at the market level could lead to biased and inconsistent estimates. Hence, we separately model weekly sales to these two segments. Sales to the CP segment is modeled as a function of price of the product and promotional variables such as the face value of coupons dropped.

    Sales to the CI Segment: Unlike other types of coupons, FSIs have the advantage of clear and full-color graphics. Further, coupons enhance the value of an advertising mes- sage, and print advertisements containing coupons are more likely to be noticed and recalled than the same advertisements without coupons (Blattberg and Neslin, 1990). Bawa and Shoemaker (1989) and Ward and Davis (1978b) found that coupons cause some house-

  • Coupon Face Value 277

    holds not redeeming coupons to make incremental purchases. By definition, coupons can- not have redemption value to the CI segment, but can have only advertisement value. The advertisement value of the coupon drop is due mainly to the presence of multicolored FSI highlighting the product. We therefore do not anticipate the advertisement value to depend on the face value of the coupon. Instead we conceptualize the advertisement value to depend on the presence or absence of FSIs. Hence, we model weekly sales to the CI seg- ment as a function of the price of the product and the advertisement value due to the coupon drop.

    STEP 3: Coupon Profitability

    In this step we combine the results from the preceding two steps to arrive at the profit- ability of the couponing operation. The gross profitability of the couponing operation can be viewed as the sum of manufacturers profits from sales to the CI and CP segments. None of the sales to the CI segment will be made with coupons. Hence all the sales to that seg- ment will give full contribution margin. However, a fraction of sales to the CP segment will be regular sales (without the use of coupons) and the rest will be coupon sales. The unit contribution from the coupon sales will be reduced by the face value of the coupon (and coupon handling costs).

    EMPIRICAL DEMONSTRATION

    Data Used

    A. C. Nielsen Company provided us three data sets for empirical validation of our pro- posed framework. Data set 1 is a household panel data that captured details regarding the quantity bought, price paid and coupon usage. Data set 2 is a store level data set which con- tains details of the quantity sold and other store causal variables. Data set 3 is a coupon data base that contains details of the various coupons that were dropped in the market. In Step 1, we model the fraction of sales to the CP segment that are coupon sales as a function of the coupon characteristics. To estimate the model parameters in this step, we use household panel data and the coupon data base. We merged these two data bases to capture the details of the total number of units sold to the coupon prone segment, the number of units sold with coupons and the face value of the coupon. In Step 2, we model sales to the CP segment and CI segment as a function of price of the product and face value of the coupon. For this step, we use the segment wise weekly sales, store causal variables, and coupon drop details (face value of the coupon and number of weeks since the coupon was dropped).

    To estimate the profitability model, we chose a commonly used consumer product cate- gory.2 The category has several unique features, such as absence of double-couponing activity (in the chains for which data were made available), absence of store couponing activity, and homogeneity in the method of coupon distribution and number of coupons dis- tributed (all coupons were in the Sunday newspapers and were free-standing inserts). Sixty- five weeks of data, from January 1990 to March 1991, are used in the analysis. Two brands

  • 278 Journal of Retailing Vol. 72, No. 3 1996

    (labeled A and B) account for most of the sales in both markets. The dataset has sales data

    on five stores in chain 1, three stores in chain 2, two stores in chain 3, and three stores in chain 4. Chains 1 and 2 are located in market 1; chains 3 and 4 are located in market 2. The

    price and store causal variables are the same across the stores in each of the four chains. Market 1 is represented by 1492 households, of which 1088 redeemed at least one coupon

    for the study product category in the 65 weeks for which we have data and are classified as belonging to the CP segment. Market 2 is represented by 924 households, of which 616

    redeemed at least one coupon in the product category and are classified as belonging to the

    CP segment.

    Formulation and Estimation of the Coupon Redemption Model...

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