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Estimation of consumer savings from coupon redemption.

Since their first introduction by C. W. Post in 1895, the distribution of manufacturer- and retailer-sponsored coupons has become an aspect of market functioning that has experienced near phenomenal growth. In 1970 approximately 2.1 billion coupons were distributed. By 1992 distribution had hit a record high of 292 billion coupons (Hume, 1992). Trend data indicate that 1992 was, in fact, a pivotal year in the popularity of couponing as a promotional strategy. After 23 years of steady increases, coupon distribution rates began to soften, dropping by some 3.7 percent in 1993 alone (Hume, 1993; Lewis, 1994; Liebman, 1993; Hume, 1993; McElnea, 1994; Whalen, 1994). In addition, both the average face value and expiration time of coupons showed a decline during the same period. From 1989 through 1991 the average face value of a manufacturers' coupon rose by 7 percent, since then it has steadily declined. In 1992 the average expiration time of a manufacturers' coupon was 4 months. By 1993 this average had dropped by 22.5 percent to 3.1 months (Whalen, 1994).

One possible explanation for why there has been a de-emphasis of coupons in the promotional mix is the complicated, costly and inefficient way whereby coupons are distributed and redeemed.

The current systems of coupon processing include hand-counting, or gross weighting, of millions of nonstandard-sized manufacturers' coupons, normally by agents that ship the coupons to clearinghouses in Mexico. Paper coupons are counted at least twice, often three times, by the various parties. Time-consuming and expensive discrepancies, adjustments and negotiations among supermarkets, manufacturers and redemption agents are normal business practices, and most agree, inexact and frustrating (Progressive Grocer, 1994: S10). Whalen (1994) bears out this view, holding that coupons are "costly to handle and a pain in the neck" (1994: 26).

An alternative explanation for the decline in coupon distribution rates is one of competing promotional priorities. In fact it appears that the decline in popularity of couponing as a promotional strategy coincided almost exactly with the introduction of the less cumbersome and costly "everyday low pricing" (EDLP) in 1992, a strategy which has enjoyed growing popularity since that time (Liebman, 1993). There is little doubt that the juggernaut of EDLP, and other alternate and less cumbersome in-store marketing strategies, such as electronic data interchange (EDI), scanner discounts and shopper cards, are forcing the industry to re-evaluate the effectiveness and efficiency of coupons as a form of promotion (Fensholt, 1995; Whalen, 1994).

An examination of the trend data also reveal the consumer side of the story. In 1992 7.2 billion coupons were redeemed by consumers in the market, representing a 2.9 percent redemption rate (Hume, 1992). However, in 1993 and coinciding with the introduction of EDLP, coupon redemption rates started to slow significantly. Between 1992 and 1993 redemption rates had slowed by some 12 percent, three times the rate of decline in distribution rates during the same period (Whalen, 1994). These data suggest that not only are manufacturers losing interest in this type of promotion, consumers may be as well.

A few possible demand-based explanations for the decline in coupon redemption rates over the past couple of years may be posited. First, faced with alternative options such as EDLP - which require no additional time and effort, shorter expiration periods and lower average face values on coupons - coupon activity might be viewed as less appealing by the consumer. An alternative explanation may be that coupon popularity is following the traditional product life cycle pattern, and is simply in the decline stage of consumer popularity. An additional explanation, and one which is explored in this research, is that the steep decline in coupon redemption rates over the past few years indicates that consumers have begun to more realistically evaluate the economic rationality of couponing activity. The decline may indicate that consumers are eventually heeding the warnings of consumer advocates over the years that coupons provide no real net benefits once consumer costs of redemption are factored in.

For decades consumer advocates have been criticizing price reductions offered via coupons and discouraging consumers from using them. As early as the 1970s, in her capacity as Presidential Advisor on Consumer Affairs, Esther Peterson criticized food coupons as a cost-increasing form of promotion. Similarly, other consumer advocates have criticized coupons on the grounds that they discriminate against low income and minority consumers, create demand surges and distort consumer decision making by providing only illusionary savings (Antil, 1985; Cotton and Babb, 1978; LaCroix, 1983; Peckham, 1978; Uhl, 1982; Varian, 1985). In this respect Uhl notes that:

Coupons do appear to be an attractive saver for shoppers, but the savings are an illusion. While some consumers can possibly save money at the expense of higher food prices and other consumers through the use of coupons, it is unlikely that coupons provide any net savings to consumers as a class (1982: 161).

Uhl (1982) elaborates on his argument of illusionary savings by saying that consumers are incorrectly interpreting the coupon face value as "compensation" for their time and effort in coupon redemption. He holds that for many consumers this accounting error creates an economic dead weight loss. Instead of saving, consumers are losing money by redeeming coupons due to the fact that their costs incurred in the redemption process outweigh the benefits in terms of dollar savings.

At the heart of this debate is the contention that the psychological impact that couponing has on consumers is distorting their perception of monetary savings, and forcing an inefficient allocation of time to couponing activity. Several consumer behaviorists support the contention that psychological benefits, which include the "thrill of dealing" and "winning at the game" (Antil, 1985) or feelings of being a "good shopper" (Schindler, 1984, 1988a, 1988b), distort consumer decision making. They hold that these psychological benefits are leading consumers to invest huge amounts of time in couponing which, if valued in monetary terms, may be more "costly" to the consumer than the actual face value of the coupon savings. This research indicates that the success of couponing may lie deeper than the simple price reductions they offer (Avery and Bautista, 1991; Krishna and Shoemaker, 1992; Lichtenstein et al., 1990; Narasimhan, 1984; Schindler, 1984, 1992). For example, Schindler (1992) reports the behavior of "coupon queens" who devote large amounts of time and effort to learning how to collect and use coupons to receive large discounts. Schindler concludes that there are characteristics of the coupon redemption process that motivate consumers to dedicate irrational amounts of time to this activity, at a cost to the consumers well beyond the amount of money involved in the direct cash savings.

FOCUS OF THE STUDY

The future of couponing as a marketing strategy and its success in terms of consumer support is obviously an important issue for marketers. Manufacturer and retailer decisions to maintain coupons as a salient element of their promotional mix should rest on the belief and hard evidence that coupons provide real benefits to consumers. If, indeed, coupons represent real savings to consumers and have the added benefit of providing the consumer with some element of control over the price paid for goods in the supermarket, couponing as a marketing strategy should not be discarded out of hand. In fact, the recent decline in coupon redemption rates might be interpreted as simply a short-term reaction to new promotional strategies being introduced into the market (such as ELDP and ECR), and a trend that will reverse itself once the market has settled down.

To date there has been no hard evidence to support the rationality of coupon use or to refute the contention of consumer advocates that coupons provide only illusionary savings. There have been no studies which have provided an evaluation of the economic rationality of coupon use, and no basic figures outlining average coupon savings. This study attempts to provide such data. A micro-level, cost-benefit analysis of the rationality of coupon use is undertaken to determine if, taking consumer processing costs into account, consumers do in fact reap net monetary benefits from coupon use. As has been noted in the review of the literature, research has indicated that consumers derive significant psychological benefits from coupon use such as the thrill of dealing, the enjoyment of getting a bargain, and control over the price paid for a good. There has been little or no research to date addressing the possible "psychological costs" involved in this type of activity. An example of psychological costs are the added complexity of search for couponed items and redemption of couponed products at the check-out register. Due to the limitations in the data used in this research, the psychological aspects (costs and benefits) of couponing could not be measured. The analysis undertaken in this research concentrates on monetary exchanges and valuation of the consumer's time in couponing activity. Although omitted from the measurement of coupon savings used in this research, psychological aspects are omitted in a reciprocal manner from both the benefits and costs estimates.

The logic underlying the analysis in this research is that, while it is known that coupons provide benefits to consumers in the form of dollar savings redeemed at the cash register, there are certain costs associated with coupon redemption which need to be taken into account in calculating real net savings. These costs include monetary expenditures for coupon processing (purchase of coupon sources such as newspapers, magazines, coupon booklets, coupon storage file), as well as the time costs associated with scanning newspapers and other media sources for desired coupons, clipping, sorting, filing, and then redeeming coupons in the store. The rationality of coupon use can only be evaluated when these costs are taken into account.

METHOD

The sample used in this analysis was obtained in a large mid-western city. The results of this study are, therefore, only generalizable to the SMSA in which the data were collected. However, the issue of geographic sampling frame becomes truly significant if one believes that the behavior under study indeed varies systematically from area to area. The authors do not believe this to be the case with respect to couponing, as there has been no previous research which has indicated that geographic region is an important predictor of coupon use. In addition, the SMSA chosen in this research has been a popular test market for the past ten years because of its unusually representative demographic profile.

The study consisted of a telephone interview and a follow-up mail survey administered to a sample of shoppers generated by random digit dialing. The telephone interviewer collected information on the shopping behavior and demographic characteristics of the primary grocery shopper and his/her family. In addition, the telephone interview was used to secure the respondent's further cooperation in completing the mailer survey. The mail survey focused on obtaining further details on the respondent's supermarket shopping behavior and his/her attitudes toward food shopping. Telephone interviews and mail surveys were completed by the primary grocery shopper in the household. Six hundred telephone interviews were completed, and the response rate to the mail survey was 62 percent, with a resulting sample size of 373 respondents.

Basic Descriptive Statistics

Table 1 presents descriptive statistics on the demographic characteristics of the sample and their grocery purchase behavior. It provides a further breakdown of these characteristics for those respondents who were not coupon users (N=70), those who were light coupon users (N=168), and heavy coupon users (N=135). Primary grocery shoppers in the sample were predominantly female (85 percent). The average age of the primary grocery shopper was 46.2 years. Mean age of primary grocery shoppers was not found to differ significantly by coupon use intensity. However, nonusers of coupons were significantly more likely to be male, and a significantly higher proportion of nonusers were unmarried. Coupon users were significantly more likely to have young children in the home and live in larger families. Heavy coupon users were significantly more likely to be in the labor force and work full time. Compared with light or nonusers, heavy coupon users were found to have a significantly higher annual gross household income.

In both the telephone interview and mail survey respondents were asked a set of questions relating to their supermarket shopping and couponing behavior (Table 1). Compared with nonusers, coupon users were found to spend significantly more money on groceries per week ($73.90 for heavy users compared with $52.50 for nonusers), and significantly more time in the grocery store (107.9 minutes for heavy users compared with 78.5 minutes for nonusers). Light coupon users were found to be more discriminating in the face value of the coupons they clipped and redeemed. Light coupon users had a mean threshold value of $0.20 on a coupon, whereas heavy coupon users were prepared to clip if the coupon value was as low as $0.15.

Empirical Measures

In the telephone portion of the survey respondents were asked to provide a dollar estimate of their average total weekly grocery expenditure (after coupon deductions). This estimate ranged from a mean of $52.50 for nonusers of coupons to $73.90 for heavy coupon users (Table 1). In addition, coupon users were asked to estimate the average weekly dollar savings they obtain from coupon redemption. This estimate ranged from a mean of $4.80 for light coupon users to $10.30 for heavy coupon users. The two measures, average weekly grocery expenditure and average weekly coupon savings, provided estimates of the gross monetary benefits of couponing to be used in the calculation of the net benefit measure described below.

In the survey respondents were asked to estimate the average dollar amount they spend on media (newspapers, magazines, coupon booklets, etc.) which they buy or subscribe to primarily for the coupons they contain.(1) [TABULAR DATA FOR TABLE 1 OMITTED] The vast majority of consumers reported spending significantly less than two dollars a week on coupon sources. In addition, respondents were asked to estimate the total amount of time (minutes per week) they spend in each of the following activities: scanning the media (mail, newspapers, fliers) for relevant coupons; clipping, organizing, sorting and filing coupons; selecting coupons for redemption; and, the additional amount of time they spend in the store looking for couponed items and redeeming coupons. The average amount of time spent on per-store couponing activities ranged from an average of 15 minutes for light coupon users to 28.6 minutes for heavy coupon users. Estimates of the additional amount of time spent in the store searching for couponed items and redeeming coupons ranged from an average of 5.1 minutes for light coupon users to 11.4 minutes for heavy users (Table 1).

In order to estimate the cost of couponing, a measure of the value of the grocery shopper's time in couponing activity is needed.(2) Conceptually one would want to obtain a measure of the opportunity cost individuals use in valuing their time in couponing. The true "opportunity cost" of time to an individual measures the full cost of its use, including both monetary (foregone earnings potential) and psychological (enjoyment/lack of enjoyment from an activity) costs. Such a multidimensional concept is indeed difficult to measure (Marmorstein et al., 1992). Psychological costs of couponing could not be measured with the data collected in this study and are, therefore, omitted from the measure of couponing costs. However, it should be noted that omission of the psychological aspects inherent in the coupon savings was done in a balanced way, that is, it was omitted from both the "costs" and "benefits" measures of couponing.

Several methodologies exist in the literature that help in generating the basis for testing various hypotheses regarding the value of this time (Zick and Bryant, 1983). One of these alternative methodologies is the opportunity cost approach, most often used by economists. Researchers using this technique derive a value for non-work time by examining the value of the individual's alternative activities that are precluded by doing this work, that is the value of the highest forgone activity (Zick and Bryant, 1983). While this approach is appealing on theoretical grounds, some regard it as an unrealistically high estimate of non-market time. An alternative methodology used in the literature is the market alternative or replacement cost approach. Using this method the value of the time to the individual is thus taken to be equal to the cost (wage rate) of a market worker hired to replace the individual in that activity. For example, one could use a housekeeper's wage to value time spent couponing. Both of these methodologies are based on logical rationales for valuing non-work time from either an economic or cost accounting approach. Alternatively, it could be argued that both these measures overestimate the value of couponing time to the individual. Some might argue that couponing is done at times of the day when there really are no alternative productive uses for one's time, or when the "cost" to the individual is almost negligible or even pleasurable (e.g., clipping coupons while watching television). All three of these alternative time valuing strategies are explored in this research. The advantage of using all three methods is that one is able to obtain an upper-, middle- and lower-bound estimate with which to evaluate coupon rationality from the consumer's perspective. The model is first estimated using an individual's market wage rate to value time in couponing (upper-bound estimate).(3) Second, an individual's time in couponing is assumed to equate with the wage of a housekeeper earning minimum wage (middle-bound estimate),(4) and finally the cost of the individual's time in couponing is assumed to be zero. The only "cost" to couponing in this case would be the dollar outlay on coupon sources, if any.

Using the measures of couponing costs and benefits described above, a measure of net coupon savings was constructed from the data. The measure (PSAVE) is calculated as gross coupon savings net of the consumer costs associated with redemption:

PSAVE = [Sigma][C.sub.i] - [[P.sub.pm] + [([T.sub.pm] + [T.sub.hi] + [T.sub.ri]).sup.*]W)]/GEXP (1)

where:

PSAVE = net weekly proportion of household grocery expenditure saved by using coupons

[Sigma][C.sub.i] = reported $ amount saved per week by using coupons

[P.sub.pm] = weekly dollar cost of coupon sources

[T.sub.pm] = minutes per week spent scanning print material for coupons per week

[T.sub.hi] = minutes per week spent handling coupons (clipping, filing, sorting, selecting, etc.) per week

[T.sub.ri] = minutes per week of extra time in store to locate and redeem couponed items

W = measure of the consumer's cost of time in couponing ($ per minute)

GEXP = reported $ weekly grocery expenditure

The variable (PSAVE) is constructed as a proportion and, therefore, controls for the fact that households of different sizes purchase different quantities of food. It should be noted that the sample includes both respondents who did and did not use coupons. For the nonusers of coupons PSAVE would be, by definition, zero. To control for sample selection bias resulting from the inclusion of both users and nonusers in the analysis, a Heckman (1979) two-stage estimation procedure was used. The Heckman procedure followed in this research involved the estimation of a set of simultaneous equations for both the probability of coupon use and coupon savings. Only results from the second stage of the estimation procedure which focus on coupon savings are reported in this paper.

To control for the fact that households with different characteristics buy different market baskets of food and manufacturers coupon at differential rates across product categories, a set of demographic control variables was included in the analysis. These variables are defined in Table 2.

Analysis

In the first stage of the analysis the measure of net coupon savings (PSAVE) was regressed on the set of variables used to control for differential household characteristics. Due to the limited nature of the dependent variable, the model was estimated using the LIMDEP maximum likelihood LOGIT algorithm.(5) Estimation of this model provides the best estimate of coupon savings, controlling for variation in characteristics across households. In the second stage of the analysis, the coefficients obtained from the first stage of the analysis are used to evaluate the level of coupon savings for target consumer groups.

RESULTS

Coupon Savings

Results of the first stage of the analysis are presented in Table 3. All three specifications of the model were significant at the .05 level.(6) These first stage results are briefly reviewed.

In the first specification of the model (using the market wage rate to value time in couponing activity) household size was significant in explaining net coupon savings. Controlling for quantity of groceries purchased, larger households were found to realize higher proportional savings from coupons. This result may be explained by the fact that household size is highly correlated with the presence of young children in the home, and manufacturers coupon heavily in product categories related to childrens' needs (breakfast cereal, health aids, diapers, baby food, formula, baby lotions, etc.) (Liebman, 1993).

Across all specifications of the model household income was found to be significant and negatively related to coupon savings. This result supports previous work in the area reporting a non-linear relationship between income and couponing activity (Babkus et al., 1988; Bawa and Shoemaker, 1987; Meloy, 1988; Narasimhan, 1984). It is likely that having a higher income reduces the marginal value of a dollar saved via coupon redemption, thereby reducing the perceived benefit of this type of economizing purchase strategy. Another possible explanation might be that coupon redemption holds negative social connotations for high income consumers.

Employment characteristics of primary grocery shoppers were found to be significantly related to coupon savings. Primary grocery shoppers who were full time employed were found to reap higher coupon savings. One might have thought that individuals who are employed full time have less [TABULAR DATA FOR TABLE 2 OMITTED] time available to devote to couponing activity. This does not appear to be the case. Two plausible explanations for this finding might be that the type of time-saving products needed in households where the primary grocery shopper is not at home for a large portion of the day (e.g., frozen entrees, pre-prepared foods) are more heavily couponed product categories (Liebman, 1993; Whalen, 1994), or it might be that full-time employment is indicative of a greater need to economize in the home (Goldscheider and Waite, 1991). It is interesting to note that neither part-time employment of the primary grocery shopper or having flexible work hours were significant in explaining coupon savings in any of the model specifications.
Table 3. Regression Results: Proportion of Weekly Grocery
Expenditure Saved by Couponing (PSAVE).(a)

 PSAVE

Variable Model 1 Model 2 Model 3

INTERCEPT 0.089(*) 0.076(*) 0.102(*)
 (0.030) (0.024) (0.026)

HHSIZE 0.009(*) 0.004 0.004
 (0.004) (0.003) (0.003)

KIDLT6 0.004 0.009 0.014
 (0.009) (0.007) (0.008)

LHHINC -0.035(*) -0.019(*) -0.021(*)
 (0.006) (0.005) (0.006)

EMPLOY1 -0.012 -0.008 -0.013
 (0.018) (0.015) (0.016)

EMPLOY2 0.018 0.020(*) 0.018(*)
 (0.011) (0.009) (0.010)

WORK 0.012 0.008 0.012
 (0.009) (0.007) (0.008)

CAR -0.012 -0.009 -0.008
 (0.014) (0.011) (0.012)

AGE -0.001 -0.001(*) -0.001(*)
 (0.000) (0.000) (0.000)

SEXF 0.017 0.022(*) 0.028(*)
 (0.012) (0.010) (0.014)

MSTATUS 0.011 0.003 0.002
 (0.011) (0.009) (0.010)

Mills Ratio -0.001 0.018(*) 0.030(*)
 (0.007) (0.006) (0.006)

Model fit 0.124 0.119 0.141

* Coefficient significant at the .05 level.

a Models 1 through 3 differ in the following respect. Model 1 uses
the market opportunity cost of time to value time spent couponing.
Model 2 uses the replacement cost estimate ($3.65) and Model 3 uses
$0.00 to value time in couponing.


Personal characteristics of the primary grocery shopper were significant in explaining coupon savings. In two specifications of the model, age of grocery shopper was found to be negatively related to savings. Older shoppers might be less inclined to use coupons due to the added time and effort needed to redeem coupons in the store. It may also be that older individuals purchase less in product categories that are heavily couponed. In two of the three model specifications gender of the primary grocery shopper was found to be associated with higher proportional coupon savings. This finding supports the work of Zeithaml (1985) who found that males do not respond as well as females to conventional promotions. It seems plausible that in couponing activities at least, the role of the frugal shopper is not as salient for men as it is for women. Marital status of the primary grocery shopper was not found to be significant in explaining coupon savings in any of the model specifications.

Coupon Gainers and Losers

The purpose of the first stage of the analysis was to obtain efficient empirical estimates with which to predict levels of coupon savings under alternative hypotheses regarding the opportunity cost of time in couponing activity. With these estimates one is able to simulate levels of savings for individuals using alternative "costs" of time, and evaluate the rationality of couponing as a purchasing strategy under these alternative assumptions. To highlight specific market segments two household characteristics, income and full-time employment of the primary grocery shopper, were chosen for further analysis (Table 4). Using these two household characteristics allowed for a more focused examination of factors closely related to time and monetary costs faced by families. All other characteristics were held constant at their mean values.

Results in Table 4 indicate that the value one places on time spent couponing plays a crucial role in evaluating the rationality of couponing as a money saving purchase strategy from the consumer's perspective. Using the market opportunity cost as a value of time in couponing results in estimated net losses for most groups of consumers in the identified income and employment categories. However, even using this high cost of time in couponing, these losses are not substantial. Losses ranged from 0.5 percent of the weekly grocery budget for unemployed, low-income consumers, to 1.3 percent for unemployed high income consumers. When using either replacement cost ($3.65) or $0.00 for time in couponing, results indicate that real net benefits accrue to all consumer groups. In dollar terms these benefits may be as high as 7.2 percent of the weekly grocery bill (employed, low income) if one uses $0.00 as the value of time. But, even under the replacement cost assumption, savings were as high as 4.8 percent of the weekly budget for some consumers (employed, low income).
Table 4. Simulation Results

Respondent Category(a) Net Proportion Saved

SIMULATION USING OPPORTUNITY
COST FOR THE VALUE OF
RESPONDENT'S TIME IN COUPONING

employed/low income 0.028
employed/high income -0.010
unemployed/low income -0.005
unemployed/high income -0.013

SIMULATION USING REPLACEMENT
COST FOR THE VALUE OF
RESPONDENT'S TIME IN COUPONING

employed/low income 0.048
employed/high income 0.037
unemployed/low income 0.026
unemployed/high income 0.013

SIMULATION USING $0.00 FOR THE
VALUE OF RESPONDENT'S TIME IN
COUPONING

employed/low income 0.072
employed/high income 0.056
unemployed/low income 0.053
unemployed/high income 0.032

a High income was defined as greater than $32,000 per year, the
median income for respondents in the sample.


SUMMARY

Over the past couple of years coupon redemption rates have been declining at a faster rate than the decline in coupon distribution rates. This trend is indicative of reduced consumer interest in this type of promotion, a trend which should be a source of concern for marketers and retailers in the supermarket industry. Several possible demand-based explanations for the wane in consumer interest were proposed. The explanation which was explored in this research is the one offered by several consumer advocates, that coupons do not offer real net benefits to consumers once the cost of couponing is taken into account. If such an explanation were indeed true then declining coupon redemption rates may be indicative of the fact that, faced with other less time costly types of promotion offers, consumers are rationally re-evaluating this type of economizing strategy.

Results of the micro-level cost-benefit analysis undertaken in this research do not support the explanation of illusionary savings being the driving force behind the recently observed decline in coupon redemption rates. They indicate that, using reasonable and conservative estimates of the cost of time, consumers do in fact realize real benefits. For some consumer groups these savings may represent somewhere between four to seven percent of the weekly grocery bill. In addition, there is reason to believe that even these estimates of consumer coupon savings may be too low. First, consider the fact that coupon savings are in some sense better than ordinary income to the consumer in that they represent "pre-tax" dollars. Second, previous research has indicated that a salient aspect of coupon use is the psychological benefits accruing to consumers from this type of activity (Avery and Bautista, 1991; Krishna and Shoemaker, 1992; Lichtenstein et al., 1990; Narasimhan, 1984; Schindler, 1984, 1988a, 1988b, 1992). These benefits relate to enjoyment of the activity itself (intrinsic benefits), the sense of control in determining the outcome of market transactions, or some higher level intrinsic benefits such as success in individual role fulfillment (i.e., smart shopper, knowledgeable consumer, efficient homemaker, etc.) as suggested by Schindler (1988a). Unfortunately, due to limitations of the data used in this study, these type of benefits could not be assessed. However, if monetary measures for these psychological benefits could be obtained they would further inflate the savings estimates obtained in this research.

It should be noted that the estimates of coupon savings used in this study were highly sensitive to the "price" of time chosen in the cost-benefit evaluation. Results of this study support findings by Meloy (1988) which suggest that the traditional opportunity cost of time estimates (market/reservation wage rate) used in many empirical studies to value non-market activity may not represent the true "opportunity cost" perceived by consumers when they value their time in couponing. Estimates of net coupon savings using the market opportunity cost measure result in many consumers being net losers. It would appear that in their decision to use coupons, consumers perceive a "cost" of their time well below their market wage rate. It is highly likely that even the minimum wage rate estimate ($3.65) used in this study overestimates couponing time costs, and that time invested in coupon clipping and redemption may be "cheap" time to the consumer in the sense that there are few forgone alternative opportunities for such time.

One limitation of the study is the fact that the estimates of coupon savings and costs used in the analysis were self-report measures. It is likely that these estimates may be biased by coupon users exaggerating their level of savings or underestimating the amount of time spent in couponing activity. Future research, using more precise measures of coupon saving (for example, scanner data) should attempt to validate the estimates obtained in this research. However, it should be noted that scanner data has the disadvantage of being able to provide only limited information on the individual shopper and no information on their behavior outside the supermarket. For example, scanner data would be inadequate to provide estimates of time spent in couponing. Time/activity diaries may be useful in this regard to obtain better estimates of the time devoted to couponing and other pre- and in-store economizing activities.

A second limitation of the study is that data were obtained from a single mid-western market area resulting in the fact that results of this study may not be generalizable to other locations. Nationally representative samples should be used to validate the estimates obtained in this research. In addition, the non-response rate to the initial telephone survey was forty-three percent and, despite monetary compensation, the non-response rate to the follow-up mail survey was still high at thirty-eight percent. Despite random sampling, it needs to be acknowledged that response bias may have resulted in a non-representative group of grocery shoppers in the sample. An attempt was made to correct for non-response bias through post hoc sample weighting. Preliminary descriptive analyses using these data indicated that the sample was not fully representative of the population from which it was drawn. A comparison of the demographic characteristics of the sample with 1990 Census data for the Standard Metropolitan Statistical Area (SMSA) in which the data were collected indicated that the sample over-represented higher income and larger households. To correct for this bias proportional data weights were created by matching the sample with 1990 Census data on both household size and income. All analyses reported in this study were estimated using these weighted data.

Future research in this area should investigate other alternative consumer-based explanations for the decline in the popularity of coupons. The idea that coupons, like products, may demonstrate a typical life cycle is an intriguing one with significant managerial implications. Alternatively, the observed decline in coupon redemption rates may be a short-term reaction to the recent introduction of EDLP and ECR. Future research should attempt to compare the attractiveness of these alternative pricing strategies from the consumer's perspective. Work needs to be done to determine the impact of different face values and expiration times on coupon redemption rates.

MANAGERIAL IMPLICATIONS

Results of this study are encouraging for manufacturers and retailers, and provide ammunition with which consumer advocates' criticisms of "illusionary" coupon savings may be rebuffed. The study indicates that the appeal of coupons is based on sound economic rationality on the part of consumers. However, the question must be posed whether coupons are economically rational for manufacturers and retailers in today's competitive grocery market. Manufacturers and retailers face the problem of allocating their scarce resources to promotional deals versus other marketing activities aimed at increasing product sales. In order to make optimal allocations, information is needed concerning the response of consumers to alternative promotional strategies, and the relative cost of each alternative. The bottom line is that an important component of successful management of price promotions is an understanding of the characteristics of the particular promotional technique that are critical to success in encouraging purchase.

In evaluating the role of coupons in the marketing mix, manufacturers and retailers should not lose sight of the salient, yet less tangible, benefits inherent in this type of promotion. The phenomenal success of coupons over the past few decades cannot be solely attributed to the monetary benefits they offer. Research studies suggest that, over and above the monetary benefits they provide, coupons render the added advantage of involving the consumer in the purchase decision prior to a store visit, providing the consumer with an element of control over market transactions, and enhancing feelings of purchase satisfaction. In fact, cents-off coupons have been found to be far more effective than, for example, price reductions in motivating a consumer to purchase (Schindler, 1992). They have been found to be more effective than in-store specials in increasing sales (Cotton and Bab, 1978), and they have a proven superior track record in being an effective means of attracting new triers to a product, encouraging brand switching, increasing category consumption, maintaining repeat purchase rates, and defending market share (Lawrence and Hume, 1992). In terms of effectiveness, the evidence suggests that couponing is, and will continue to be, an important promotional tool for manufacturers and retailers. On this basis of the benefits they offer, coupons are likely to continue to be a successful strategy in encouraging and maintaining consumer support. However, manufacturers and retailers need to be sensitive to maintaining the level of benefits and lowering consumer costs involved in this type of promotion, especially in the light of the onslaught of EDLP. Higher coupon face values and longer expiration times may be critical elements in the success of this form of promotion, as will be increasing consumer convenience through shelf dispensers and scanner technology.

Clearly, gains in distribution efficiency could offer manufacturers and retailers a less costly alternative to using this tried and tested promotional tool. Coupon technology (bar-coded coupons or electronic cash register dispensed coupons tied to shopper cards) offers lower costs and provides the ultimate in information-based marketing. Through such technology the retailers (and manufacturer, if the data are made available) would be able to get an accurate fix on who is buying their products, when, where and how much (Ingram, 1995). Given such information marketers would be able to target shoppers and reward them for their loyalty.

An added advantage of coupons are that they provide both manufacturers and retailers some power over the purchase situation. Free standing insert (FSI) coupons offer manufacturers an important means of combating the growing power of retailers in the market. They allow manufacturers to reach consumers directly with a price decrease, bypassing the retailer. On the other hand, in-store dispensed coupons provide retailers with a means to target a very small and focused target market. Instead of wasting money on a regional/national coupon drop-off, in-store coupons can service a relatively small target market quite effectively. Finally, despite EDLP it appears that coupons might become an even more salient element of the promotional mix. Under EDLP low pricing becomes the standard, and coupons will become useful and necessary to establish a point of difference in the mind of the consumer.

The authors wish to thank the two anonymous reviewers for their comments and input during the revision of this paper. Their contribution greatly strengthened the content and focus of the work.

1 The reported estimate of weekly dollar amount spent on coupon sources seems somewhat high. It is likely that respondents in the sample were discounting the alternative benefits gained from these sources. For example, although the daily newspaper may be bought primarily for the coupon inserts, it also provides informational benefits which might have been discounted.

2 The cost of couponing used in this study does not include the psychological aspects (costs and benefits) of this type of purchase. If one assumes that the psychological benefits outweigh the psychological costs (Narasimhan, 1984; Schindler, 1992), then the measures of net coupon benefits used in this study underestimate the actual coupon benefits accruing to the consumer.

3 Market wage rates were only observed for those individuals who were employed in the labor market at the time of the survey, and not for unemployed individuals. The standard solution for obtaining an estimated wage rate for unemployed individuals is the reservation wage estimate proposed by Zick and Bryant (1983). Using data on employed respondents, reservation wage estimates were obtained for unemployed respondents using a Heckman (1979) two-stage procedure.

4 The minimum wage in the SMSA where the data were collected in 1990 was $3.65.

5 The variable PSAVE is limited in that proportions cannot be negative or greater than one.

6 It should be noted that the variable "Mills ratio" reported in Table 3 was obtained from the previous analysis predicting coupon use. Entered into this model, the Mills ratio corrects for sample selection bias resulting from the fact the sample contains both respondents who used and those who did not use coupons. The significant coefficient on the Mills ratio indicates that non-users are significantly different from coupon users.

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Author:Avery, Rosemary J.; Haynes, George W.
Publication:Journal of Managerial Issues
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