The Influence of Coupon Duration on Consumers’ Redemption Behavior and Brand Profitability

Forthcoming, European Journal of Operations Research

48 Pages Posted: 22 Aug 2019

See all articles by Zelin Zhang

Zelin Zhang

Renmin University of China

Minghui Ma

York College of Pennsylvania - Department of Business

Peter T. L. Popkowski Leszczyc

University of Queensland - Business School

Hejun Zhuang

Brandon University

Date Written: August 20, 2019

Abstract

This research proposes an analytical model of the joint optimization of coupon face value and duration together with the product price, and determines the impact of coupon design on consumers’ redemption behavior. A model of rational forward-looking consumers’ redemption behavior is derived that incorporates forgetting (to redeem) and stochastic redemption costs. Results show that when product price is exogenous, long-duration coupons may result in increased seller profits and always increase consumer surplus. Moreover, a one-period coupon is never optimal when (1) the difference in valuations for high-value (loyal) and low-value (non-loyal) consumers or (2) the coupon face value is larger than the redemption costs of high-value consumers. Long-duration coupons tend to be optimal when the level of recall of high-value consumers is sufficiently low, which reduces redemption by high-value consumers. Coupon duration together with face value plays an important role in coupons’ ability to price discriminate between different consumer segments and to avoid head-on competition with other sellers. Results can replicate empirically observed redemption patterns, which has important implications for the strategic targeting of coupons to different consumer segments. A coupon may result in an increase or decrease in price. When the difference in valuation between high-value and low-value consumers is high (relative to the redemption costs), a seller can either reduce price and lower face value or increase coupon duration for the purpose of avoiding redemption by high-value consumers.

Keywords: Analytics; Behavioral OR; OR in marketing; Pricing; Retailing

JEL Classification: D4, L1, M31, C7

Suggested Citation

Zhang, Zelin and Ma, Minghui and Popkowski Leszczyc, Peter T. L. and Zhuang, Hejun, The Influence of Coupon Duration on Consumers’ Redemption Behavior and Brand Profitability (August 20, 2019). Forthcoming, European Journal of Operations Research. Available at SSRN: https://ssrn.com/abstract=3439818 or http://dx.doi.org/10.2139/ssrn.3439818

Zelin Zhang

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

Minghui Ma

York College of Pennsylvania - Department of Business ( email )

York, PA 17405-7199
United States

Peter T. L. Popkowski Leszczyc (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Hejun Zhuang

Brandon University ( email )

Brandon, Manitoba
Canada

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