The Effect of Social Media on Coupon Strategy

In conversations with retail executives about couponing and other customer-specific pricing strategies, a new concern has appeared.

For the longest time, coupons have been one of the primary mechanisms for executing what economists call price discrimination. By identifying price-sensitive customers and sending them coupons, you win/keep their business without giving away discounts to customers who would have bought at the pre-coupon price anyway.

A fundamental assumption behind this approach is that coupon receivers will not share the coupon (or  even just the fact that they got a coupon) to the non-receivers. Clearly, you stand to lose heavily if loyal (but price-insensitive) customers come to know that others are getting discounts but they are not. Regardless of how price-insensitive you are, you are likely to feel that it is unfair when another customer gets a discount and you don’t.

This “no sharing” assumption has been steadily losing its validity with the increasing use of digital coupons since you can effortlessly forward an email coupon to a friend or family member. Furthermore, a number of coupon aggregation sites (example) have emerged to make it even easier to find coupons for products/retailers you are interested in.

In both these cases, however, there is a bit of natural “friction” that somewhat diminishes the negative consequences of coupon sharing. While forwarding email coupons is easy, you are more likely to forward to immediate family members or close friends – you probably won’t do a mass forward to your entire address book. To take advantage of coupon aggregation sites, the customer has to take the trouble of finding them, checking them on a regular basis, or signing up for daily emails. By definition, price-insensitive customers are less likely to take the trouble to do so and hence are less likely to be “exposed” to the problem.

Well, things have gotten a whole lot worse recently, thanks to social media. Apparently, people are increasingly posting coupons they receive to their Facebook page (sharing? bragging? who knows) and as a result, the juicier coupons are spreading virally and the coupon-receiver’s social graph is becoming aware of it very fast.

What does this mean for the retailer?

  • Irate emails and calls to the toll-free number from customers demanding why they didn’t get the coupon.
  • Discounts to customers who don’t “need” the discount

Note that coupons with unique customer IDs don’t help. If a customer shows up at the store with a coupon that was sent specifically to her sister-in-law, you can’t really tell her that she can’t get the discount since her ID doesn’t match the ID on the coupon. You will have a big customer-service problem in your stores.

So what can the retailer do to address this problem?

One strategy is to segment your price-sensitive customers based on certain parameters and design coupons in line with these parameters so that customers “self select”.  Common examples of this strategy: student/senior-citizen discounts for public transportation and museums etc, airlines requiring a Saturday night stay to segment leisure vs business travelers and so on.

In the retail context, segmenting by age or other customer characteristics (e.g., demographics) is on questionable ethical and legal ground. It may be better to segment based on buying behavior. For example, you can group your price-sensitive customers based on when they shop.  You may find (like many retailers do) that a sizable number of customers tend to shop at lunch-time on weekdays, possibly because their workplace is close to the store.

Now, create a coupon for 30% off purchases made between 11.30am and 1.30pm today and tomorrow and send it to everyone. For most customers, it will be impractical to take advantage of this coupon if they don’t work near a store or if they can’t take off at lunch-time to shop.  And amongst those who do, price-sensitive customers are much more likely to take the trouble to get out of their workplace and make the trek to the store.

Results (hopefully!) : Everyone gets the coupon so social sharing won’t create a customer-service nightmare. Price-insensitive customers are unlikely to take advantage of the coupon since it is too much trouble. Price-sensitive customers are likely to take advantage of the coupon since it matches the way they shop anyway.

Of course, the downside of these segmenting strategies is that since each coupon is targeted to just one segment of price-sensitives rather than all price-sensitives, the impact of each coupon run on the business is smaller. We can’t have everything, I guess.

I am sure there are many other ways to address this problem. Ideas?

 

 

 

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20 thoughts on “The Effect of Social Media on Coupon Strategy”

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  14. You make an interesting point, John.

    I guess a countervailing factor could be the instinct to brag to your network about what a great deal you found.

    Thanks for your comment.

  15. I think people who use social media could be less price sensitive in general.

    The price sensitive consumer will spend more time researching information on the web and less time tweeting (which I hate!!)about their great deals or coupons.

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  17. >> I just hope the other data scientists and companies out there in this arena don’t ruin the party for others…there’s no larger barrier than one created when Joe Public deems a particular method of collection to be invasive (iPhone backlash, etc…). <<

    Couldn't have said it better, Phil. Thank you.

    -Rama

  18. Rama –

    Both good points. I guess the real issue with coupon “discrimination” and socio-demographic targeting is that the audience perceives a slight, whereas with Adsense “bannering” and behavioral targeting, there is less of an outright taboo. Gilt and the Rue La La’s of the world built a business on exclusivity (another topic for another time…would be interested to get your take on how this fits).

    Anyway, it becomes semantic, but what I’m trying to say is that no matter the method, it all ends in more targeting and more “invasive” data collection (I’m a data proponent in general, so devil’s advocate here). Companies will not swim in the other direction unless mandated by law. So we’re there and it will only get more involved.

    From here it becomes a matter of perception, and your post is great (and what I took from it as a nod towards “kindly perceieved/benign” targeting). At this juncture, I’m as excited as you about the frontier we’re about to embark upon – with one caveat: I just hope the other data scientists and companies out there in this arena don’t ruin the party for others…there’s no larger barrier than one created when Joe Public deems a particular method of collection to be invasive (iPhone backlash, etc…).

    Perception is reality here, and we all have to tread lightly to a certain extent. Big Data goodwill will be on shaky ground, and I’m glad that you are bringing some of these issues to light.

  19. Phil, Thanks for your thoughtful comments.

    >> What makes it any different than AdWords and AdSense finding out “who you are” and “what you’re all about” through your emails, texts, location etc…and creating targeted marketing campaigns for their clients (advertisers) that essentially discriminate (“target”) based on many more data points than today’s coupon campaigns? < < Good question. While there's no major difference between the two in terms of objectives and methods, I think they do differ in their "share-ability": it is not clear to me how a banner ad or an Adwords paid search ad can be shared on Facebook, unlike an emailed coupon. Further, if my friend saw a banner ad for 30% off on a website and told me about it, I somehow don't feel that it is unfair while if he got the same offer via email and I didn't (even though we are both on the email list of that retailer/advertiser), I'd feel discriminated against. > Let’s take it as a given that advertising and coupons are not going away, and more specifically they will always be targeted (the flow through is cost benefit negative if it’s a low-conversion swath campaign of yore). So, given that, I think the only way to get more efficient and to piss less people
    off is to get MORE targeted < I fully agree with the need for more targeting. However, behavioral targeting (i.e., based on what/when/where you buy) may be as effective as socio-demographic targeting and considerably more defensible from a customer goodwill standpoint. - Rama

  20. Nice post. Thought-provoking.

    I tend to agree that coupon “redlining” (meaning targeting specific demographics for special treatment – good or bad) will face some scrutiny given it’s use in other situations, but I can’t help but think that it is the most granular and targeted/economically-viable, and microeconomics ly efficient/beneficial way to vend.

    What makes it any different than AdWords and AdSense finding out “who you are” and “what you’re all about” through your emails, texts, location etc…and creating targeted marketing campaigns for their clients (advertisers) that essentially discriminate (“target”) based on many more data points than today’s coupon campaigns?

    They’re both marketing tools. The group buying and coupon companies just happen to give you something tangible and immediately recognizable as a “special, one-time” opportunity – which by the way, is rarely the case (try googling that amazing pair of pants you found at a timed, one-time only price and you may be surprised to find it listed perpetually for that same price across the web). The only real difference is the smoke the marketers are using. Via ad placement, it’s pretty and catchy graphics or a funny phrase that gets you to click. For Groupon, it’s the “everything must go” and “look at this exploding exclusive offer” draw. It’s all marketing, it just plays on different parts of ones psyche.

    Now, if algorithims are in the works to predict which of these two types work best for certain people (or a combination of both, or timing for them respectively), then that would be even more efficient and targeted, and inherently more valuable. But would that be another step into 1984? I think we’re headed there already. Google, iPhone tracking, etc…In fact, I think the coupon game is a ways behind the gorillas of digital advertising at this point given their (explosive) infancy.

    The whole issue for retailers is trust and that fine balance of not pissing off their customers with 1) spam and 2) exclusive deals that people miss out on, and find out about (the elasticity issue). Let’s take it as a given that advertising and coupons are not going away, and more specifically they will always be targeted (the flow through is cost benefit negative if it’s a low-conversion swath campaign of yore). So, given that, I think the only way to get more efficient and to piss less people
    off is to get MORE targeted – meaning more redlining. Redlining has a bad connotation because it gave preferred rates to the rich and harmed the poor. It was unfair in a “the rich get richer” way (and we all know there is no way to motivate the masses than start on about the “top 1%” stuff). However, the coupons are a bit more Robin Hoody. They redline to discount for the less affluent?

    The real ethical issue will be the Joe Camel phenomena. Meaning if the marketers and couponers start using the targeting to sell cigarettes, guns and booze to specific demographics, then we have a problem. A fine line between discounting and suggestive selling. Shades of grey.

    I’d say let them hone their targeting while keeping an eye on deceptive and harmful practices (like those mentioned above). Granular prediction is what made google work in search. Now blackhats are gaming the system. Coupon campaigns will be beneficial, until blackhats start gaming the system and push harmful/unneeded products. But man is that a subjective can of worms.

    Thanks for the post.

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