Reports

The Impact of Coupons on the Search-to-Purchase Funnel: Theory and Empirical Evidence

Arun Gopalakrishnan and Young-Hoon Park, 2019, 19-106-01

Firms often use coupons to stimulate sales, yet little research has examined how coupons work, specifically in the entire search-to-purchase funnel. Arun Gopalakrishnan and Young-Hoon Park investigate how marketing activity affects different stages of the search-to-purchase funnel among heterogeneous customers. They develop a model of customer search leading to purchase in the absence and presence of couponing, and test the model using data from a field experiment with an online retailer. Customers were divided into two (high-value and low-value) segments with two types of coupons (base value and better value).

Findings

Overall, they find that while couponing can influence customers by stimulating purchases under coupon redemption, the dominant effect of coupons was to lift sales not involving coupon redemption, which is known as a promotion-as-advertising effect. Purchases with coupon redemption account for only less than 20% of purchases in all treatment conditions.

The lift in purchase amount is higher for high-value customers compared to low-value customers in the case of the base coupon, which is primarily driven by an increase in purchase incidence rather than dollar spend. This heterogeneous effect of coupons on purchase incidence is shown to be misleading when examining consumer search behavior using clickstream data for two reasons. In the absence of couponing, first, high-value customers are more likely to visit the online store and purchase than low-value customers. Second, the base coupon lifts the likelihood of visiting the online site by about 23% for both segments. Therefore, the advertising effect of the base coupon is limited to the top of the search-to-purchase funnel, i.e., increasing customer traffic to the online site, and is similar for both segments.

A more lucrative “better” coupon was also administered to the high-value segment as a separate treatment. This better coupon was found to have the same lift for the likelihood of visiting the online site as the base coupon. Interestingly, it also increased purchase conversion and coupon redemption. These findings show that the better coupon impacts high-value customers not only in the top but also in the bottom of the search-to-purchase funnel, while the base coupon influences both segments only upstream in the funnel.

Put into Practice

The pervasive advertising effect of couponing should be considered carefully by managers beyond the usual price discrimination rationale for couponing.

Because high-value customers are already heterogeneous in their search-to-purchase behaviors (in a direction beneficial to the firm) compared to low-value customers, any lift upstream in the funnel gets magnified in terms of revenue lift. Further, managers who are concerned about margin erosion with the better coupon for high-value customers can consider the effect of coupons that improves both upstream and downstream responses in the search-to-purchase funnel. Thus, the advertising effect of coupons changes the decision calculus for the design of targeted promotions.

Arun Gopalakrishnan is Assistant Professor of Marketing at the Olin School of Business, Washington University in St Louis. Young-Hoon Park is Sung-Whan Suh Professor of Management and Professor of Marketing at the Samuel Curtis Johnson Graduate School of Management, Cornell University.

Acknowledgments
The authors thank several managers at the participating company for their efforts in making this research possible. They also thank seminar participants at the 2016 Missouri and Washington St. Louis Marketing Camp, 2017 Marketing Dynamics Conference, 2018 Marketing Science Conference, and University of Virginia for their comments.

Related links

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