How to Promote Sales: Discount Promotion or Coupon Promotion?

Abstract

In this paper, we examine how a merchant should choose between discount promotion (offering a discount through an online third-party promotion platform) and coupon promotion (issuing on-package coupons directly to consumers). We develop a two-period model in which the merchant optimizes the promotion decision in the first period and does not promote in the second period. We identify two consumer segments: informed consumers who are aware of the merchant’s offering at the beginning of the first period and know the true quality of the product, and uninformed consumers who are not aware of the merchant’s offering at the beginning of the first period and underestimate the product quality. Moreover, the merchant has access only to informed consumers when adopting coupon promotion or when choosing not to promote, while the merchant can access both informed consumers and uninformed consumers when offering discount promotion. In this setting, we find that the merchant should offer discount promotion when the quality estimation of uninformed consumers is large and/or when the proportion of informed consumers is small; otherwise, the merchant should adopt coupon promotion when the effect of coupons in the first period is large and choose not to promote when the effect of coupons in the first period is small.

Keywords

Sales promotions / on-package coupons / coupon promotion / discount promotion / delayed incentive

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