Promotional Design for Small Businesses: The Operational Value of Online Deals
36 Pages Posted: 5 May 2021
Date Written: April 7, 2021
While revenue and demand management has been an active area of research for many years, relatively little work has empirically examined the revenue management tools used by small service providers. Unlike large sophisticated firms, small service providers have limited means for coordinating demand and supply. This is particularly true when they face large demand swings, say, from popular holidays. In recent years, a new demand management tool, the online deal, has become popular among small service providers. These deals allow service providers to reach consumers through an intermediary platform and differ from a simple temporary price cut because they require consumers to pre-pay for the service. However, they grant consumers flexibility in when they actually consume the service since they do not require customers to pre-specify their redemption dates. In this paper, we use a dataset from two leading Chinese deal platforms to study empirically how small service providers use online deals to manage demand swings driven by national holidays. We use a structural model built on service providers optimally designing “holiday” deals that anticipate a positive or negative demand shock. We show that holiday deals effectively manage holiday demand through three levers, one price based (the discount level) and, more interestingly, two time based (the time from the deal’s launch to the holiday and the duration of the deal). To our knowledge, using the launch date as a demand-shaping lever has not been studied in the literature. Also, little work has empirically studied how duration can be operationalized to manage demand. We find that the three levers jointly serve three operational roles – boosting and flattening mean demand as well as moderating demand variance. We furthermore reveal that heterogeneous deal designs across industries are driven by heterogeneous holiday demand swings and profit margins. Industries anticipating holiday demand valleys rely on holiday deals to boost demand by designing deep discounts. Industries facing large shrinks in profit margins on holidays wisely choose a launch date as well as a long duration to flatten their demand. Via counterfactual analysis, we quantify that service providers could see a mean profit improvement of 62.5% if they wisely launch holiday deals. Our work provides practical guidelines for service providers who are considering entering the booming holiday deal business.
Keywords: new business model, service operations, supply-demand coordination
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