A Model for Evaluating the Profitability of Coupon Promotions

Abstract

In the experience of the authors, most firms do not have good procedures for estimating the net profitability of coupon promotions. Instead, managers generally examine a number of subsidiary measures such as: redemption rates, market share and the direct costs of the coupon promotion. A user-oriented computer model is presented for simulating the effect of coupon promotions on sales and calculating net profitability. The model includes the actions of the manufacturer, retailers, and consumers. It takes into account three key phenomena of consumer response: the acceleration of product category purchases, the brand loyalty of coupon redeemers, and repeat purchase effects. The model also incorporates the effects of retailer promotions that often accompany a coupon program. Data from an actual application are used to illustrate use of the model.