The influence of coupon duration on consumers’ redemption behavior and brand profitability

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 redemptions 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.