Omnichannel retailing operations with coupon promotions
As omnichannel retailing emerges, consumers now have more ways to shop. For instance, in addition to typical shopping processes, they can also buy online then pick up in store (BOPS) or visit the store to touch and feel the products then order online (showrooming). However, omnichannel retailers may face challenges of between-channel competition or differences in marketing tactics and consumer preferences between channels. To achieve an optimal integrated omnichannel strategy, retailers employ various pricing strategies, including coupons.
Coupons allow for market segmentation, price discrimination, and effective price control, and are considered more flexible and effective than traditional price discounts in impacting customers’ channel choice, loyalty, and subsequent upselling sales. For omnichannel retailers, coupons affect consumer price expectations and specific purchase behaviour for different channels, as well as guide consumers’ channel transfer and promote interaction between different channels. Despite the increasing prominence of coupon promotion in omnichannel retail, firms are still struggling to quantify the impact of coupons on pricing and channel integration, especially in a retail environment where multiple channels interact, to design appropriate price-coupon combination strategies.
This study investigates the action mechanism of coupon promotion on omnichannel price and operational decisions by setting up a theoretical model in which the omnichannel retailer offers coupons to attract potential customers. Its contributions are threefold. First, it attempts to explore whether an omnichannel strategy can be integrated through coupon promotion. Second, it provides a theoretical foundation for omnichannel retailers to adjust their pricing strategies in the presence of a coupon promotion to win market share and profit. Third, it identifies the optimal operational strategies between different coupon distribution modes to identify what kinds of coupons the retailer should offer.
Method
A demand function that accounts for coupon promotion was identified based on the demand theory in microeconomics. An omnichannel retail system was set up with three different channels through which the retailer sells products: online-only, BOPS, and store channels. Coupons were offered in the online-only channel and BOPS channel to derive more market. Three different coupon distribution modes were explored: no coupon was provided by the retailer (used as the benchmark model), retailer offered coupons with a common face value, and retailer offered coupons with a different face value in the BOPS and online-only channels.
Key findings and recommendations
First, if the omnichannel retailer does not offer coupon, price and operational strategies should account for the consumer’s channel preferences. A channel with higher consumer preference can derive more profits.
Second, when the retailer adopts coupon promotion, setting a higher price may be sub-optimal when consumer preference for the online channel is large. Only if the promotional effect of the coupons is large can the retailer charge a high price. Moreover, when offering coupons with a common face value, the retailer can lower its coupon promotional efforts if consumers are more likely to purchase online. But when offering coupons with a different face value, a strong coupon promotional effort should be adopted when the competitive channel is at an advantage.
Third, the retailer should reduce its price and promotional efforts when the negative effect generated by the coupon is relatively large, but should raise its price and increase promotional efforts when the redemption rate of the coupon is moderate. A large redemption rate may reduce their marginal revenue, while a small rate may not capture sufficient market volume.
Fourth, when the negative effect generated by the coupon is relatively small, the retailer can expand its market volume by introducing coupon promotions and raise price. Furthermore, if the cross-selling generated by the BOPS channel is large, and coupons have a different face value, the retailer can improve its coupon promotion efforts for the online-only channel.
Fifth, coupon promotion can derive a higher profit for the retailer, regardless of whether the coupons offered have a common or different face value. The retailer should take the channel characteristics and consumers’ channel preferences into consideration and offer coupons with a different face value for these two channels.
Researchers
More information
The research article is also available on eprints.