Solving the Coupon Conundrum

Shared coupons are more popular than coupons sent directly by firms, but are redeemed less often. Switching the focus to the coupon’s social benefits changes the results.

Mengzhou (Austin) ZHUANG

18 May 2023

Shared coupons are more popular than coupons sent directly by firms, but are redeemed less often. Switching the focus to the coupon’s social benefits changes the results.

Retail has increasingly moved online in recent years, accelerated by COVID. Competition has followed it, becoming just as competitive online as it is in bricks and mortar stores, perhaps more so. An online presence—whether it’s a company website or a mobile app, or both—allows marketers to access a wide range of online tools to draw attention to their company’s products and services and convince consumers to buy.

One of the most valuable and versatile of these tools is the coupon. Coupons are nothing new. In paper form, they have been offering special prices, savings or deals for decades and have become a mainstay of marketing. Now, digital coupons sent online can be closely monitored and their offerings quickly changed, offering many more nuances for marketers to experiment with, including tracking customer preferences, responses to differentiated offers, and the ability to connect with consumers in new ways.

Today, the most important channel for connecting with consumers is through social commerce—the selling of products and services directly through social media. As the name suggests, social commerce takes place at the intersection between e-commerce and social media. Onn many of the platforms where people connect socially, they can now also directly buy products and services from companies and service providers. The most popular platforms include Instagram, Facebook, Pinterest and, in China, WeChat.

Social commerce worldwide is estimated to be growing at 31.4 percent annually. According to Statista, global sales made on social media platforms were worth an estimated US$992 billion in 2022, and are forecast to reach about US$2.9 trillion by 2026. Clearly, it’s a market no one wants to miss out on.

The changing face of coupons

Digital coupons are widely used on these platforms and are often sent directly from companies to existing or potential customers. Called direct coupons, they offer discounts, such as a percentage off purchases, or a cash discount upon spending a certain amount.

Shared coupons are increasingly popular. These combine two components: a financial saving and social sharing. Shared coupons are usually sent by companies to an existing customer or influencer (the coupon giver) who then shares it with someone in their network (coupon receiver).

Several companies have achieved huge success in social commerce, such as Pinduoduo. Pinduoduo launched in China in 2015 as a platform enabling farm producers to connect directly with consumers. It has since expanded to offer a wide range of products, including fresh food, beauty products and electronics. Pinduoduo—which translates roughly as “together, more savings, more fun”—encourages customers to share buying opportunities with their social networks in order for all of them to secure a bigger discount. The higher the number of the participants, the lower the price. This strategy encourages buyers to keep sharing until the biggest discount has been applied to the product price within a certain timeframe.

WeChat Moments is the social networking feature of China’s WeChat app, which has 1.3 billion active monthly users. As well as offering coupons on their own landing pages, companies often encourage their customers to post pictures of articles on their Moments pages and ask their friends to like them. WeChat is the preferred platform for distributing these shared coupons.

Companies already know that sharing coupons is an important way to build a successful coupon distribution campaign and improve sales. Online coupons supplied by a third part review platform, for example, are more effective at promoting sales than direct coupons sent by the company, and are more likely to be redeemed. Among millennials, 90 percent share coupons and 43 percent of them do so on social media.

For companies, shared coupons offer an added—and valuable—sales channel. By allowing a coupon to be shared with a customer’s network, companies are able to reach potential customers that they would otherwise not be able to reach. The fact that the coupon is transmitted from one friend to another enhances the coupon’s attractiveness and trust level.

Despite these advantages, shared coupons are not redeemed as often as direct coupons. Marketers have been struggling to understand what the problem is. Now, new research conducted by Eric Fan, Beibei Dong, Mengzhou Zhuang and Fengyan Cai has cast an insightful light on how consumers respond to coupons, and found an effective way to boost redemption of shared coupons: creating a co-creation experience.

The co-creation experience

The co-creation experience is an activity that the giver and receiver must complete together. They work together to create something, which builds a bond between friends. The activity can be, for example, designing a coffee mug together, working out an itinerary or playing a game. Once the coupon has been won through their shared effort, both the giver and the receiver can enjoy its benefits.

For example, the researchers designed a co-creation experience in which the coupon receiver was sent an online link that said “your friend (name of coupon giver) has invited you to play a game and claim the coupon.” Both the giver and receiver of the coupon had to play a 30-second game at the same time. They had to use a virtual basket to catch burgers falling from the top of the screen. Their combined total of burgers caught was converted to virtual dishes which they could share on their social media accounts. This made it a cooperative experience. After they finished the game, they were given in a link to claim the coupon.

Understanding the problem

The researchers found that the reason for low redemption of shared coupons is rooted in consumers’ expectations of different behaviours. Consumers differentiate between the way they expect a company to behave towards them, and the behaviour they expect of friends and people in their communities. The key to understanding why shared coupons are not redeemed as often as direct coupons lies in understanding this norm conflict.

Companies are expected to make suggestions that involve spending or saving money, such as offering a coupon discount. In personal relationships with family, life partners and friends, economic transactions of most kinds are generally not acceptable. Gifts and sharing, for example, are typically exchanged between friends without seeking payment and without any obligations being incurred. The question of money or compensation is not appropriate in these circumstances and conflicts with the invisible red line that makes it unacceptable to talk about money with friends. The perception of social inappropriateness also makes the receiver hesitant to engage with a coupon offered by a friend.

This hesitation contrasts with relationships with strangers or businesses, where most kinds of interactions usually involve money.

Friendships and personal relationships focus on a social goal of boosting or deepening the relationship, whereas business relationships focus on the economic goal of making money. Stepping across this invisible boundary between the social and the economic can alienate potential customers.

It follows that a friend or influencer—whose relationship with followers is typically of a friendly nature—is not an appropriate source of a coupon that offers economic savings.

Why the co-creation experience works

So what to do? The researchers believed that building a deeper social connection between the coupon giver and receiver could resolve the problem—in effect, switching the emphasis of the coupon sharing process from the coupon’s economic-driven benefits to its social interaction-driven benefits. If the two parties had to work together to earn the benefits of the coupon, say by a shared co-creation experience, this would create a bond of achievement and friendship between them that would be strong enough to override the norm conflict.

The idea proved correct. The team found that direct coupons were redeemed more often than shared coupons because consumers struggled with the overlapping economic and social benefits of shared coupons. That was as expected. But when shared coupons were combined with experience co-creation, their redemption rate outperformed direct coupons, even though consumers had to make more effort to get the benefits of the coupon.

This experience co-creation coupon was more successful because “… the norm conflict is reduced by the shared experience, which both achieves social goals and enhances the attractiveness of the shared coupon. In addition, we know that consumers are more attentive to messages shared with them by friends than those they receive directly from companies,” explain the researchers.

Boosting redemption rates further

The research had proved that coupons with experience co-creation were a hit with consumers, but still, not all consumers redeemed their coupons. Often, they languished unused in customers’ online accounts.

One tried and trusted way to increase coupon redemption is to increase the value of the coupon. Making the offer just too good to refuse has been shown to increase redemption rates. However, the cost to the company is high. Moreover, customers could come to expect increasingly big discounts if they wait before redeeming the coupon, making this a potentially treacherous path for marketers to follow.

Another trusted alternative is to send a quick reminder to the consumer to use their coupon. Sometimes, a simple nudge in the form of a short email can do the trick.

What would happen if both options could be combined in a way that wouldn’t incur an additional cost to the company and that would increase the redemption rate? The researchers had already proved that coupons based on experience co-creation were the most successful. It followed, then, that sending a message that reminded the customer about the fun experience—rather than emphasizing the cost-saving on the coupon—could boost redemption rates, perhaps to an extent that would negate the need for the company to increase the coupon value.

And so it proved. A low-value coupon increased its value by almost 50 percent when a follow-up social message was sent compared to when no message was sent. The social message was worded to remind the customer about the friendship and experience rather than the monetary benefit: “you still have a coupon you earned together with your friend [name]”.

Key takeaways

Social commerce is complex and involves deeply embedded values about relationships and appropriate behaviour. Customer expectations of different types of relationships needs to be understood and respected in order to identify the best path for companies to achieve their desired results. Marketers who understand the nuances of social commerce can find creative ways to make it outperform traditional e-commerce without additional costs for the company. One of those ways is by offering an experience that is co-created.

The three-step process that has been proven to work here is share, co-create and communicate.

First, design an experience to require the joint participation of the coupon giver and the receiver in a shared co-creation activity, such as a game.

Second, encourage consumers to share coupons and then deepen a social relationship by taking part in the experience.

Finally, communicate with the receiver to remind them of their coupon and its social value by emphasising the way they came to receive the coupon. This enables companies to achieve the same result as a higher-value coupon without increasing their costs, a win-win for both customers and the company.

About this Research

Eric (Er) Fang, Beibei Dong, Mengzhou Zhuang and Fengyan Cai. (2023). “We Earned the Coupon Together”: The Missing Link of Experience Cocreation in Shared Coupons. Journal of Marketing, 87(3), 451–471.

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Translation

Long held assumptions about the mutually incremental relationship between quantities and discounts have been upended by new research. The rule of thumb that the bigger the purchase quantity, the higher the discount is shown not to hold true for medium-sized customers buying products such as semiconductors, with implications for other products and industries.

Pile them high and sell them cheap. Buy more, save more. These slogans, and the thinking that lies behind them, have been accepted principles of product sales and marketing for generation.

The logic seems indisputable from the points of view of both the seller and manufacturer and that of the buyers. If a seller or manufacturer makes a large number of identical items and a single customer wants to buy a large part of this total production, then that buyer will receive the goods at a cheaper price than a buyer who wishes to buy a much smaller amount of the same product. The accepted theory has been that the seller is eager to dispose of his stock as quickly and as easily as possible, and so a big customer will get a better deal. By the same logic, it follows that customers who buy progressively smaller amounts of the same product will receive progressively smaller discounts.

However, the underlying premise behind these assumptions – that the bigger the purchase, the bigger the discount – has now been shown to be valid for only part of the story. In a new study by Wei ZHANG, Sriram DASU and Reza AHMADI entitled “Higher Prices for Larger Quantities? Nonmonotonic Price-Quantity Relations in B2B Markets,” published in 2017 by the Institute for Operational Research and the Management Sciences in Maryland, USA, the first part of the established belief holds true: the biggest customers do receive the biggest discounts. These customers remain the most valuable to a seller or manufacturer as they account for the bulk of sales. They are therefore typically able to use their size and bandwidth to exert pressure successfully on the seller to get a large discount.

The research focused on investigating the impact of a buyer’s purchase quantity on the discount offered. In this case, the seller was a microprocessor company selling semi-conductors, which are a short-life cycle product. The company negotiates with each of its buyers to set a price for the product. The buyers are mainly large electronic consumer goods manufacturers. In line with established beliefs, the research showed that the discounts received by smaller customers increased in line with the quantities they purchased, and the smaller the quantity they purchased, the smaller the discount they received.

What is unexpected is the experience of medium sized buyers. According to established logic, these customers would be expected to receive bigger discounts on their purchase price than smaller buyers. But this is not the case. In fact, the researchers found that as the quantities bought increase, the discount decreases, and then increases again for the biggest quantities.

“Contrary to our intuition, larger quantities can actually lead to higher prices,” say ZHANG, DASU and AHMADI.Thus, while previous beliefs of a bigger purchase quantity meaning a bigger discount would have resulted in a curve heading steadily north-eastwards, the results of ZHANG, DASU and AHMADI’s studies is an N-shaped curve. This unexpected result is rooted in the importance of capacity to the seller and its impact on the price negotiation process, explain ZHANG, DASU and AHMADI.

To understand the importance of capacity in price setting requires a switch in focus from the buyer’s mind-set to that of the seller. The seller or manufacturer is not concerned solely with getting the best possible price for the product, they also place a value on capacity.

‘’Large buyers accelerate the selling process and small buyers are helpful in consuming the residual capacity,” write ZHANG and his team. “However, satisfying midsized buyers may be costly because supplying these buyers can make it difficult to utilise the remaining capacity, which may be too much for small buyers but not enough for large buyers. Therefore, midsized buyers are charged a “premium.”

To get the best price for all his products, the seller needs to avoid transactions of a medium size and instead plan his sales based on a rationing decision. The rationing decision depends on the remaining capacity level, purchase quantity, demand distribution and the buyer’s profit margin before subtracting the cost of this product. The calculation can be done by following a dynamic capacity rationing formula devised by the researchers. The formula is based on the need for the seller to find a balance between controlling the capacity allocated to each buyer while still offering a capacity range that is acceptable to the buyer.

Ultimately, ZHANG & Co, say, “The seller should reserve capacity for buyers who are willing to pay more.”

The pertinence of the research is clearly of most use to firms manufacturing or selling semi-conductors. This is a highly competitive industry with several unique features and is characterised in particular by fast changing technological developments. In the semi-conductor industry, manufacturing costs are high and lead times are long and these factors lead to inflexible capacities. It is common practice in the industry for sellers to allocate capacity to different product lines based on demand forecasts and to start work on the related production several months ahead of the planned delivery date. Customers arrive sequentially and differ mainly in the quantities of product they order. Although products have a set price, the actual price paid is typically agreed after a process of negotiation, with big buyers usually driving a hard bargain. Because of the nature of the business, negotiation on prices is inevitable, explain the researchers.

“Buyers know that the marginal production cost of microprocessors is low and that sellers are eager to discount prices to fully utilise their capacities. Moreover, buyers can allocate their business among competing sellers.”

But while buyers may have an advantage when it comes to price, sellers often have an advantage when it comes to selling and controlling capacity. Buyers are free to meet their needs by buying from different semiconductor suppliers, but they tend to decide on suppliers early on in the purchasing process. This is because the technical features offered by different suppliers vary, and once selected, these features will impact the design of the buyers’ products and will be difficult and costly to change. That means that buyers tend to keep to their chosen supplier.

The lessons that can be drawn from the study may also be useful to some degree to other businesses and products. Inflexible capacities are also a feature of many businesses in the tourism industry, for example, although the researchers note there are different characteristics and constraints involved – for example, hotel rooms do not go out of date in the same way that semiconductor products become obsolete. Hotel rooms, airline and coach seats are all fixed number items that the seller or owner needs to sell in quantities to his best advantage. The main customers in these industries include bulk buyers such as travel agencies and resellers who want to buy in large quantities but who also want to negotiate the best prices. As in the semi conductor business, the individually agreed deals are closely interconnected, with the price and quantity agreed for one buyer impacting the price and quantity to be agreed for the remaining buyers. The researchers recommend that sellers develop a price-quantity analysis model that can help them optimise their prices. As with semi-conductors, the key point for the seller is the need to control the quantity being sold to each buyer before negotiating the price.

“Basically, given that each transaction has an impact on subsequent transaction, a good model of the price-quantity relation is necessary for the optimisation of the trade-off between the profit from the current buyers and that of future buyers,” they explain.

Contributing Reporter: Liana Cafolla

Source: Wei Zhang, Sriram Dasu, Reza Ahmadi (2017). Higher Prices for Larger Quantities? Nonmonotonic Price–Quantity Relations in B2B Markets. Management Science 63(7): 2108-2126.

https://pubsonline.informs.org/doi/10.1287/mnsc.2016.2454

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