To Whom, When, and How Much to Discount? A Constrained Optimization of Customized Temporal Discounts

39 Pages Posted: 29 Sep 2013

See all articles by Joseph Johnson

Joseph Johnson

University of Miami - Department of Marketing

Gerard J. Tellis

University of Southern California - Marshall School of Business, Department of Marketing

Eddie Ip

Wake Forest University School of Medicine

Date Written: September 27, 2013

Abstract

Customized temporal discounts are price cuts or coupons that are tailored by size, timing, and household to maximize profits to a retailer or manufacturer. The authors show how such discounts allow companies to optimize to whom, when, and how much to discount. Such a scheme allows firms to send just enough discounts just prior to the individual’s purchase of a rival brand. To do so, the authors model household purchase timing and brand choice in response to discounts and use Bayesian estimation to obtain individual household parameters. They illustrate the model on a Japanese data set having price cuts, a US data set having coupons, and another US data set having discounts. They formulate the optimization task of customized temporal coupons as a constrained multiple-knapsack problem under a given budget. They use simulations of the empirical contexts to obtain optimal solutions and to assess improvement in profits relative to existing practice and alternate models in the literature. The proposed model yields increase in profits of 18% to 40% relative to a standard model that optimizes the value but not timing of discounts.

Keywords: Optimized Discounts, Temporal Discounts, Constrained Budgets

Suggested Citation

Johnson, Joseph and Tellis, Gerard J. and Ip, Edward, To Whom, When, and How Much to Discount? A Constrained Optimization of Customized Temporal Discounts (September 27, 2013). Available at SSRN: https://ssrn.com/abstract=2332270 or http://dx.doi.org/10.2139/ssrn.2332270

Joseph Johnson (Contact Author)

University of Miami - Department of Marketing ( email )

United States

Gerard J. Tellis

University of Southern California - Marshall School of Business, Department of Marketing ( email )

Hoffman Hall 701
Los Angeles, CA 90089-0443
United States
213-740-5031 (Phone)
213-740-7828 (Fax)

HOME PAGE: http://gtellis.net

Edward Ip

Wake Forest University School of Medicine ( email )

3rd Fl. MRI Bldg Medical Center Blvd
Winston-Salem,, NC 27103
United States

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