Consumers love coupons. In 2018, 94 percent of shoppers used coupons, according to marketing advisor Valassis. That’s not a one-off statistic: 89 percent of consumers used at least one coupon in the fourth quarter of 2016, according to data and analytics company Inmar Associates.
Traditionally, only national-brand manufacturers issued coupons; but in recent years, retailers have begun to do so too, for both national and store brands—prompting manufacturers to also change their approaches to coupons. Ideally, there should be different pricing strategies for each of the three main types of coupons: manufacturers’, retailers’ national brands, and retailers’ private labels, according to research by University of Massachusetts at Amherst’s Christoph Bauner and Emily Wang, Penn State University’s Edward Jaenicke, and Asia University, Taiwan’s Ping-Chao Wu.
The researchers analyzed Nielsen Homescan data, which measures retail activities around the globe, including point-of-sale data from checkout scanners. The data target purchases of ketchup, mayonnaise, and peanut butter by 40,000 US households in 52 markets. The researchers considered general features―including flavor, size, and packaging―as well as overall quality of these products. They focused on major retailers whose private-label brands are popular enough to compete with national brands.
Using a theoretical model they built, Bauner, Jaenicke, Wang, and Wu separated consumers into two categories: price sensitive, or those who always look for coupons, and price insensitive—those who don’t.
Their study builds on previous research, including a 2006 analysis by Rutgers’s S. Chan Choi and Northwestern’s Anne T. Coughlan. For this reason, Bauner and his coresearchers use data from 2006 to avoid the potential complication of major changes to the products in the years following that study.
Their model suggests that the value of a retailer’s national-brand coupon decreases as the private-label product increases in quality, and as the differences between the two products increase.
For example, according to the model, a manufacturer is likely to first decrease and then increase its coupon value as store-brand mayonnaise improves in quality, and should increase its coupon value as the store brand becomes increasingly distinct from the national brand, thus attracting more price-sensitive buyers. The retailer will respond in turn by decreasing the value of its own coupon for the brand-name product. Thus, consumers will not enjoy the same price benefit as they would with the manufacturer’s coupon.
On the other hand, the value of retailers’ private-label coupons is not affected by the differences in features between the store and national brands, but rather by consumers’ overall willingness to pay for the product.
Considering how differentiation affects each, how should national- and private-brand coupons be issued?
For national brands, when a store-brand product is lower in quality, the best way forward is to set a higher product price and offer a higher coupon value. National brands should also have higher prices and coupon values if their products have very different features from the store-brand versions, but product and coupon prices should be lower if there are only minor differences.
Retailers, which profit from both national and private-label products, can implement a simpler strategy for their own brands, the researchers write. They should raise product prices as quality increases, and keep the price independent of other differentiation from the national brand. If a product is of higher or similar quality to the national brand, the retailer will benefit most by raising prices for the product rather than raising a coupon’s value. If there is a coupon offered, its value should be kept constant.
Bauner says that there have been important changes in couponing over the past decade, including the increased use of electronic coupons and the rise of online shopping. Because of the focus on 2006 data, this research did not cover either trend.
“I think our results would largely hold for brick-and-mortar retailing,” he notes, “although both consumer groups and product groups might have to be defined more narrowly. I’m not as confident about bringing those results to online retailing at the moment, as the online industry operates differently.”