Coupons

<STD: Serious Topic Disclaimer>

In the interest of offering content both didactic and accessible, the following Serious Topic will not include proper source support. This means you shouldn’t believe any of it. If you find the discussion compelling, however, I encourage you to pursue a more demonstrable truth.

A while ago, I was discussing coupons with a friend of mine after we had gone grocery shopping.

“Coupons are such a raw deal,” is something similar to what he said. “They’re like rebates. Stores could just put on a sale so that everyone would capture the benefits of the savings; instead, they limit savings to the people who take the time to cut out coupons.”

It’s an interesting thought. I wonder where coupons come from. I suspect they weren’t born out of advertising for the store offering the discount at all, because they seem less effective than normal sales for that. I suspect they were devised as a means of peddling publications: buy this magazine/newspaper, and you’ll find coupons inside. Then, of course, the magazine/newspaper pays the store offering its coupons.

How do coupons and sales influence business? Here’s how I imagine it:

 Let’s make up a store called, say, Supermarket. Supermarket wants to make a profit of $1 million every year, and has to decide between two different types of savings to offer.

Before offering any discounts, here is the equation for determining Supermarket’s profit:

(Revenue) – (Costs) = $1 million

Let’s imagine, for the sake of simplicity, that the Revenue variable is limited to the amount of money Supermarket gets from selling off its inventory. Let’s also stipulate (again, for simplicity’s sake) that the Revenue variable is the amount of money that Supermarket gets for selling the standard amount of inventory—that is, the amount that it sells when it doesn’t incentivize customers (with discounts) to buy more (or incentivize new customers to come buy things).

Now for the discounts:

Type 1: Sales. Supermarket discounts items in the store; the net discount is x%. The new formula for profit is:

(Revenue * [1 – x]) + (New sales) – (Costs) = $1 million

The Revenue variable is smaller because less money is made off of the baseline sales. However, we need to add a new variable: New sales. Because things are cheaper, some people buy more stuff, and some people who used to buy elsewhere start buying at Supermarket. The result? Supermarket still makes that $1 million, but they charge people less money on average. Swell!

Type 2: Coupons. Supermarket sends out coupons that offer discounts to whomever brings in those coupons and buys the corresponding products, discounted y% (an amount which might, but probably doesn't, equal x). The formula:

(Revenue * [1 – y]) + (New sales) – (Costs) = $1 million

Yes, it’s the same as the previous formula. Coupons and sales don’t offer mathematically different outcomes as far as Supermarket is concerned. But they are materially different options from a distributive perspective. Take a look:

Let’s theorize that Supermarket knows that it makes the most money when its customers actually save a total of 10%. That is, Supermarket is operating in an efficient market, has lots of good information, and knows that its profit margin is maximized when customers capture a savings of 10%. All things considered, that's the point at which reducing costs and attracting new sales balances out to the highest gain.

If Supermarket has $1 million of inventory at any given time, they could just have a sale that discounts every item by 10%. In this scenario, every customer would capture a savings of 10%--on every item, each person would save 10%. On that $1 million of inventory, that would mean a savings of $100,000, plus more savings on the new sales that would be drawn in due to the sale (what a dismal sentence!).

Alternatively, Supermarket could discount some items more than 10%, and some items less than 10%. They might discount fresh produce 50%, cookies 2%, and cigarettes not at all. So long as the net discount delivers a 10% savings to the customers, this would, in theory, equal out. Of course, it’s also functionally the same thing. When you grocery shop, do care about your total bill, not the dollar breakdown. If I offered to sell you a gallon of milk and a carton of eggs for $5.00, you wouldn’t care if each cost $2.50 or if the milk cost $4.50 and the eggs $0.50.

Of course, reality turns this logic upside down for (at least) two reasons. The first is that smart shoppers would simply buy the highly-discounted items at Supermarket and the others at some other store that discounts them more; the second is that demographics would change the customer population at Supermarket. People who buy lots of produce and don’t smoke would tend to shop there. This self-selective bias would ruin the profit projections. But hey, this is theory, not reality.

Then there are coupons. If Supermarket knows that it wants its customers to secure a 10% actual discount rate, it also knows it needs to send out a quantity of coupons that represents a much larger rate of savings than 10%. Naturally! Because not all coupons will be used. When every item is on sale, there’s just no way to avoid saving. But even if Supermarket sent out coupons for 10% off every item, some people wouldn’t use them, and the total discount would be lower.

Some people just don’t care about coupons. Mr. CEO is too rich to care; the time he would spend clipping coupons is worth more to him than the money he’d save. Then there are some people who will spend a lot of time clipping coupons because they need to save every penny they can. These people will touch savings that might greatly exceed 10%. So essentially, issuing coupons rather than setting general sales allows customers to do their own cost/benefit analysis and self-select their savings rate. This naturally means that greater savings are allocated to lower-income demographics.

Looking at it from this perspective, coupons suddenly seem like a very generous system. It's almost social welfare! Just like our healthcare system (at least as of 2014) and virtually every other social program, coupons take money out of rich peoples' pockets (in the form of missed savings) and put give them to the poor! Weird. And yes; rebates are the same thing. We've all shamefully neglected to send in rebates before. If you did, it's because you could afford to. Someone who really needed that $50 wouldn't have failed to ask for it.

All of this stuff is really hard to project, of course. Market inefficiencies and transaction costs are important! For example, producing coupons is not without its costs. This is, I suppose, where economists and accountants get into fights, and why "externalities" is a dirty word in most of my classrooms. What if printing coupons creates lots of chlorofluorocarbons and forces Supermarket to buy expensive carbon offsets on some cap-and-trade market somewhere!?

I also wonder how extreme couponers (these people I’ve seen chronicled on TV who clip coupons as full-time jobs and manage to buy thousands of dollars of groceries for pennies) are influencing this balance.

I’m no business/marketing/economics expert, clearly. I don’t understand why stores would turn to coupons except for the seemingly altruistic purpose of redistributing costs away from lower income individuals. They introduce greater uncertainty (e.g., the percentage of savings mailed that will be actually used in the store) and higher costs. Perhaps there are some tax credits available to businesses issuing coupons; that seems like it would be good policy to me. Or maybe coupons really do convince people to go to the store and seek out certain products, only to pick up other stuff as well. I’m sure the devil is in…well, not the details, but real consumer behavioral trends that my basic theoretical exploration didn’t explore. Altruism is rarely the motivator in these matters, in any case.