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. …