Coupon Economics

An old friend and faithful blog reader, TM, asked me to write about coupons.  Turns out, there are TV shows about “extreme couponing.”  I’m glad TM wrote because discussing coupons gives me the chance to introduce one of my favorite concepts in economics.

To Coupon on Not to Coupon?

Why doesn’t everyone clip coupons?  Aren’t we (and I am not a coupon guy) leaving money on the table when we unceremoniously trash the coupon-related junk mail?

Economics offers a straightforward answer:  it takes too much time and effort for some people to coupon.  Deciding to do any activity requires balancing the costs versus the benefits.  With couponing, the costs are time, effort, and organization.  You might also not get to buy the exact brand you want when you want it.  For a typical family, the most extreme couponista might zero-out her food bill and save $5000 – $7000 per year.  This benefit must then be measured against the costs of time and effort.

Like most decisions, thinking about one’s opportunity cost is appropriate.  We must ask what one could be doing with her time and energy if she weren’t couponing.  For many people, even $5000 a year isn’t worth it.  $5000 per year breaks down to $20 per weekday.  Plenty of well-paid, working people would rather spend their leisure time (say from 6 to 10pm each night) playing with kids or watching TV rather than be paid $20 to give up some of this activity.  I personally would dread coming home each day if it meant someone handed me an Andy Jackson and then I had to coupon for an hour.

This all implies those with low opportunity costs of couponing (relative to income) will in fact coupon.  Those with low opportunity costs will disproportionately be those with flexible or non-existent work schedules and easy to manage kids.  Or, it might be those with low incomes such that $20 a day is quite valuable.  Or, we might find people who derive enjoyment out of the couponing itself which makes their payoff $20 per day PLUS the enjoyment.

My casual observation is the lower-income and/or stay-at-home moms tend to be the serious couponers, which agrees with the simple economic prediction outlined above.

Why Do Coupons Exist?

Are companies leaving money on the table by offering coupons?

The basic reason for a coupon is explained by “price discrimination.”  Price discrimination is when a firm sells the same good to different customers at different prices.  In this case, “discrimination” should not have a negative connotation.  It just means firms are able to make a distinction between customers.  Price discrimination is one of my favorite concepts because once you know what it is you see it everywhere.

Imagine there are two types of grocery shoppers.  Type A is very price-sensitive, watches sales closely, shops around, knows a good deal and waits to get a bargain.  These types would do well on The Price Is Right because they know how much everything costs.  Type B is less price-sensitive, doesn’t watch for sales, and more or less walks into a store and buys what they see.

When you walk into a store, firms would love to know if you are Type A or B.  That way they could offer “special prices just for you.”  In short they could  “discriminate” between the two types of consumers and charge each the most she is willing to pay.

In practice, firms can’t typically sort their customers this way.  They have to list one price on the shelf.  Here is the problem:  if the firm sets the price high, then Type B will still buy but Type A won’t.  If they price low, then both A and B will buy buy the firm will leave a lot of money on the table.  Coupons let firms charge Types A and B different prices without having to ask customers what type they are.

In many cases, being a Type A customer will correlate with having low opportunity cost for couponing.  Those who are willing to coupon also are often more sensitive to price.  This means firms can offer coupons and let the customer reveal which type she is.  Customers (Type B) who are less price-sensitive and highly value their leisure will ignore coupons and pay higher (listed) prices.  Price-sensitive customers (Type A) will use the coupons and pay lower prices.

Coupons allow firms to charge different customers different prices without having to list different prices or find out which type each shopper is.

Is Extreme Couponing Good?

When a customer takes couponing to the extreme, isn’t it just a suck on the economy?

I would argue that firms see the very small group of extreme coupon clippers as the unavoidable cost of being able to price discriminate.  The benefits firms get from being able to price discriminate must exceed the losses from what they give away to extreme couponers.

Certainly, extreme couponers have figured out a way to work the system.  I don’t see that as morally objectionable in this case since private companies are allowing it.  Though, note that restrictions on how coupons can be used are attempts to limit the volume of freebies.  Coupons are not so easy that you can pick up a free pamphlet and walk out with half the store.

However, if technology makes extreme couponing widespread, I guarantee firms will modify how coupons can be used.  I can imagine an entrepreneurial coupon guru setting up a website that allows you to enter your preferences about what you like to eat each week.  The website would then source all the necessary coupons for you at your local store and generate a shopping list so you can minimize your bill.  The cost of couponing would be dramatically reduced.

If zeroing-out your grocery bill became automated and easy, you can bet firms would change their game.  Right now, couponing is too costly for enough people that firms still benefit from being able to price discriminate.

Firms Try to Figure Out Willingness to Pay

It should be no surprise firms want to charge as much as possible.  Couponing is one way to do this, but firms would really like to find out more about just you.  How much will you pay?

Whenever possible, firms try to find out this information.  One example is a car sales man.  When you go to buy a car, you might think the guy is just being nice asking about you.  In fact, he is trying to find out your willingness to pay.  He will ask about your job.  Whether you have owned that brand before.  What part of town you live in.  How long you have been looking.  Why you need the car (e.g. if you are having a baby in 2 days you might be much more willing to pay for car seat space).  A famous study also shows he will consider your race and gender.  In general, he is trying to determine “special price for YOU.”

Another example is how online stores might/do determine your willingness to pay based on your online activity.  Amazon was doing this in the past.   If they know you buy every new book by a certain author, they might raise the price.  Yet, if they see you are shopping around for the book they might give you a more competitive price.  I’m not sure “clear your cookies” in this case would always be the best advice.

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2 Responses to Coupon Economics

  1. says:

    Nice read, I just passed this onto a friend who was doing some research on that. And he actually bought me lunch because I found it for him smile Therefore let me rephrase that: Thank you for lunch!

  2. Josh says:

    I’m doing research for a paper in microeconomics and this post was very helpful. Thank you.

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