Coupons are a fun example of price segmentation. Let’s look at their usage through the lens of our price segmentation glasses.
As you may recall, price segmentation requires 2 steps: 1. segment the market and 2. create a pricing mechanism.
1. Segment the market
Coupons segment the market into two groups: people willing to invest time and energy to get a lower price and people who are not willing to put in the effort.
This segmentation is not black and white. Very few people always use coupons, and most of us would be willing to use a coupon if it was worth enough. For example, most of us do not use coupons to save a dollar off of Welch’s Grape Juice, but I would wager that most of us would be willing to use a coupon for 50% off of a brand new car.
The two segments are those think the effort is worth the value of the coupon and those that don’t. Another way to think about this is people who value money more than time vs. people who value time more than money.
2. Create a pricing mechanism
In this case the coupons are our pricing mechanism. Most of us pay the normal price, but those who are willing to put in more time and effort to use a coupon get a discount.
Right now on the Internet are hundreds of sites that offer coupons you can use. Do you use them? If not, why not? Probably because most of us are not that price sensitive. Think about who uses those sites … people who are price sensitive, people who are willing to put in the effort to get a better deal.
IMPORTANT: As a general rule, price segmentation works by charging the majority of the customers a standard price and then giving a discount to people who can somehow prove they are price sensitive. Step 2 pricing mechanisms are methods we use to allow people to prove they are price sensitive. In this case, using a coupon is proof of price sensitivity. In the previous example we looked at, students showed an ID at the movie theater as proof they were price sensitive (theater owners determined that on average students are more price sensitive than the rest of us.)
To summarize, coupons are a pricing mechanism we use so people who are very price sensitive can pay a lower price, and these people prove they are price sensitive by investing time and energy to use the coupon.
Action: Does it make sense in your business to offer coupons? Will people who are very price sensitive use them while the majority of your customers will not?
ps – Coupons are also used for reasons besides price segmentation. A common goal of coupons is motivating new customers to try your product. The purpose of this commentary was not to evaluate coupons, but to show how coupons are used in price segmentation.