Thursday, July 19, 2007

Only Schmucks Pay Retail

Ordinarily, price discrimination is profitable if firms can segment consumers by how much they are willing to pay. By offering discounts to low-value consumers, firms profit because they can increase sales to low-value consumers without cannibalizing (losing) sales to high-value ones.

However, recent research by colleagues Mike Shor and Rich Oliver showed that this intuition does not always hold . They studied the use of "promotional codes" on websites, an online analog to discount coupons. They found that the click-through rates on real websites that had boxes for promotional codes were so much lower as to render the promotional discounts unprofitable. They conclude that "Web sites prompting [high-value] customers to enter a 'promotion code,' ...may unwittingly be losing customers who otherwise would be willing to purchase."

Apparently, no one wants to be a schmuck.(1)

(1) Schmuck also shmuck: n. Slang; a clumsy or stupid person; an oaf.


  1. Prospect theory, anyone? i.e. The presence of a promotional code box frames the purchase as a loss if you lack the code.

  2. as an emarketer, often times a promotion code holds no special value (no coupon, in effect) for pricing and is simply used to track the direct response to a piece of DM or email. what, if anything, could be used to mitigate this 'schmuck' effect? a radio button that says, "I have a promocode", that when clicked would reveal a promo box? probably wouldn't work. interesting problem.