Coupons …


Have you ever wondered why a prominent pizza chain in India spends so much money in sending SMS coupons to 1000s of people every day? Though in principle it looks like a promotion campaign, an in-depth observation would make it obvious that it doesn’t make sense to run some or other expensive promotion every week for so many people. So the real reason behind these costly SMS coupons is very interesting

Let me explain you a bit in detail in context of this pizza company. Let us assume every day some 1000s of customers walk-in to pizza vendor outlets to have their pizzas. Among 1000s of people who are similar looking and with very minimal interaction during the time of ordering, it is going to be a difficult job for a sales man at the outlet to differentiate price sensitive customers against relatively insensitive  ones.

 To differentiate it does couple of things, the very first time you place an order at store or via phone, to identify who you are, they note your mobile number too. Then if you haven’t gone to the pizza outlet for couple of weeks after the first visit, you would get a least value SMS coupon of “Order a medium sized pizza and get Rs 50 off in next 10 days”. You may not receive this at all if you have visited the outlet again in next 10 days of your first visit as Pizza outlet can easily mark you as a price insensitive customer; let us say type “A”.

Assuming you haven’t visited and you received the first least value coupon then you can perform one of these actions. Either you may utilize the coupon within the period or ignore the coupon. If you utilize the coupon, Pizza outlet knows that you are price sensitive customer and it puts you under bucket B.

If you haven’t utilized the first coupon, then after some more time, it may send a more attractive coupon of “Buy a Medium Pizza and get 100 Rs Off” instead of 50 Rs off. Now if you utilize the second coupon, you would be put under Bucket B if not you may receive a much more attractive coupon after some more time. Off course this grading should be dynamic as time passes, based on our purchase pattern and kinds of coupon utilized by the customer.

Hope now it makes sense on why your mother advises not to drive in a car to buy vegetables from a roadside vendor or not to disclose your profession when you meet the physician in your area as he can easily place you under bucket A

Now in what way this classification helps the outlet? Assume the cost of making a pizza is 100 Rs including all fixed and operating costs, even if Pizza outlet can sell the pizza for 150 Rs, it makes a cool profit of 50 Rs. So to extract the maximum of consumer surplus, Pizza outlet would like to know whether you are A, B or C type customer so that it can sell its pizza for 250 or 200 or 150 and pocket a cool 150, 100 or 50 from you. In economics it is called “Price Discrimination”

 Ok now leaving pizza story aside  I don’t think it is that difficult to come up with innovative ways of classifying our customers too as A, B or C to maximize the consumption of consumer surplus (if at all any :)) than one fixed rate for all. So if you have any interesting coupon ideas that make sense to our business write to suggestions@crmit.com

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