The Operational Advantages of Threshold Discounting Offers

59 Pages Posted: 5 Aug 2013 Last revised: 17 Jun 2016

See all articles by Simone Marinesi

Simone Marinesi

The Wharton School, University of Pennsylvania

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: June 16, 2016

Abstract

The authors study threshold discounting, or the practice of offering a discounted-price service if at least a pre-specified number of customers signal interest in it, as pioneered by Groupon. We model a capacity-constrained firm, a random-sized population of strategic customers, a desirable hot period and a less desirable slow period. Compared to a more traditional approach (slow period discounting or closure) threshold discounting has two operational advantages.

First, the contingent discount temporally balances demand when the market for the service is large, and reduces supply of the service (preserving higher margins) when the market is small, allowing the firm to respond to the service’s unobserved market potential. Second, activation of the threshold discount signals the market state and the consequent service availability to strategic customers, inducing them into selfselecting the consumption period to one that improves the firm’s capacity utilization. Yet, threshold discounting can be harmful in situations with chronically low demand. In contrast with past work on strategic customers, their presence is advantageous to firms in our context.

A calibrated numerical study shows that threshold discounting improves firm profits over a traditional approach by as much as 33% (7% on average); surprisingly, gains are higher in more uncertain markets.

Keywords: Threshold Discounting, Groupon, Crowdsourcing, Strategic Customers, Business Model Innovation

Suggested Citation

Marinesi, Simone and Girotra, Karan and Netessine, Serguei, The Operational Advantages of Threshold Discounting Offers (June 16, 2016). INSEAD Working Paper No. 2016/41/TOM. Available at SSRN: https://ssrn.com/abstract=2306108 or http://dx.doi.org/10.2139/ssrn.2306108

Simone Marinesi

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Karan Girotra

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

Serguei Netessine (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

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