Price discrimination using in-store merchandising

The authors compare the effectiveness of in-store coupons and straight off-the-shelf price discounts (bonus buys), in generating incremental sales and profits for the retailer. In five field tests, they find that, on average, in-store coupons lead to a 35% greater increase in the promoted brand's sales than bonus buys offering the same level of discount. Because redemption rates average 55%, in-store coupons produce a 108% greater increase in dollar profits than bonus buys. Both promotion vehicles have the same effect on the rest of the category, so coupons lead to higher overall category sales and profits. The authors develop a unified decision framework for a retailer maximizing category profits, that considers the trade-offs involved in using coupons and bonus buys in response to bill-back trade deals. Their empirical application in the ready-to-eat cereal category shows that the retailer passes through larger amounts of a trade deal when using in-store coupons. As a consequence, at the optimal discount level, unit category sales and dollar category profits are substantially higher with coupons. Robustness checks show that the findings hold over a wide range of parameter values and are, thus, generalizable.