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When Are Discount Vouchers Good for Small Businesses?

Groupons, social coupons, discount vouchers, or whatever you want to call them, have become one of the main means for local and small businesses to achieve the goal of attracting new customers in the hope of turning them into loyal ones. However, these coupons’ actual usefulness in achieving this goal has been questioned over and over again. In a previous post, one of my colleagues discussed how discount vouchers (for convenience purposes, I will call them this from now on) offered by small businesses often lead to monetary losses, damage to the brand, and the scaring away of loyal and fully paying customers.

Taking a more optimistic point of view, in this post I will focus on a scientifically based approach to the benefits of offering discount vouchers.

Three researchers from Harvard University and the University of Chicago were set to examine whether such large discounts, like the ones usually offered through discount vouchers, could actually be profitable. They suggest that for most merchants, profitability means balancing two extremes: attracting new customers and offering large discounts to regular fully paying customers.

They find that the balance, hence profitability, from discount vouchers can be achieved in two cases. The first is price discrimination. In order to yield profitable price discrimination, the discount voucher must enable the merchant to target a price-sensitive population that is different from the population he usually caters to. The second is advertising. In order for the discount voucher to be used as an advertising tool, it must target a population characterized by low recognition of the business offering the voucher.

What can we learn from these research results? The main conclusion is that discount vouchers are only profitable when they are used to target new populations that differ from the business’s “traditional” clientele in price sensitivity and familiarity. Even though this conclusion is somewhat intuitive, it is refreshing since it is based on economic and mathematic models.

With that said, targeting new populations through discount vouchers is becoming harder and harder as their usage is spreading widely and turning mainstream. Unlike other coupons, which are still considered something only price-conscious consumers use, online discount vouchers offered by Google, Groupon, Living Social, and MasterCard, to name a few, have become something everybody takes advantage of.

Based on: Edelman, Benjamin, Sonia Jaffe, and Scott Duke Kominers. “To Groupon or Not to Groupon: The Profitability of Deep Discount.” Harvard Business School Working Paper. (2011): n. page.

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