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 th at, 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 dis count. Because redemption rates average 55%, in-store coupons produce a 108% greater increase in dollar profits than bonus buys. Both promot ion vehicles have the same effect on the rest of the category, so coup ons lead to higher overall category sales and profits. The authors dev elop a unified decision framework for a retailer maximizing category p rofits, that considers the trade-offs involved in using coupons and bo nus buys in response to bill-back trade deals. Their empirical applica tion in the ready-to-eat cereal category shows that the retailer passe s through larger amounts of a trade deal when using in-store coupons. As a consequence, at the optimal discount level, unit category sales a nd dollar category profits are substantially higher with coupons. Robu stness checks show that the findings hold over a wide range of paramet er values and are, thus, generalizable.