The Effect of Package Coupons on Brand Choice: An Epilogue on Profits

Abstract

In Raju, Dhar, and Morrison (1994), a paper that appeared earlier in this journal, we developed an analytical model and conducted empirical analyses to examine the effect of package coupons on market share. In this epilogue, we extend the analytical framework in our earlier paper to study the relative impact of package coupons on profits. We also report findings from five quasi-experiments (including two new quasi-experiments) that provide empirical validity to our model-based predictions. Our results have significance for brand managers in packaged goods firms. Our analysis suggest that while selecting among package coupons, brand managers should carefully define which performance criterion to use: market share impact, redemption rate, or profit impact. Package coupons that lead to the highest market share impact (or redemptions) may not lead to the highest profit impact. We compare the relative profit impact of the following package coupons: peel-off, on-pack, and in-pack. Peel-off coupons must be redeemed on the same purchase occasion on which they are obtained. On-pack coupons are obtained at one purchase occasion but can only be redeemed for a discount on the couponed brand at a future purchase occasion. In-pack coupons are similar to on-pack coupons except that the consumer is unaware of the presence of these coupons when the product is purchased (in-pack coupons are printed or placed inside the package). Consumers with an in-pack or on-pack coupon from a previous purchase occasion will have a higher probability of purchasing the couponed brand even if the brand was not currently offering coupons. Consequently, to understand choice behavior, it is not enough to take into consideration the current choice environment; our model therefore must also keep track of whether or not a consumer has a package coupon that was obtained on an earlier purchase occasion. In other words, since choice is dependent on the purchase environment as well as the state of the consumer, we use a Markov model to represent the choice process. Analytical results are derived based on the long run probabilities of the Markov transition matrix. Our analytical and empirical results suggest that by and large, of the various package coupons examined in our research, on-pack coupons lead to the highest impact on profits. Furthermore, while peel-offs lead to a higher market share than in-packs, because in-packs stimulate repurchase among previous buyers, they lead to higher profits than peel-offs; though only for stronger brands.