Why location-based smartphone coupons can benefit buyers and sellers.
When two competing firms — think Dunkin’ Donuts and Starbucks — both focus on traditional targeted pricing tactics, such as sending direct mail coupons, economic models suggest that both companies often end up worse off than they would otherwise. Instead of both benefiting from higher prices, the firms end up competitively lowering their prices in tandem. This “prisoner’s dilemma” typically results in a lose-lose scenario in which neither company profits as much as it could.
However, a new form of targeted pricing that tracks consumers not by their home addresses but by the smartphones in their pockets — geo-targeting — appears to upend this model. According to a new paper, “Competitive Mobile Geo-Targeting” authored by Questrom assistant marketing professor Monic Sun and coauthors at New York University and the University of Connecticut, geo-targeting may benefit both consumers and the firms they patronize.
The key difference, says Sun, is the always-changing location of consumers’ smartphones. “If a coupon is mailed, consumers can’t change their home address to get a different coupon,” she notes.
Smartphone offers, by contrast, can change every time a consumer’s location in the world does. Consumers might get one coupon offer if they’re close to the seller’s store, a better offer if they’re near a competitor’s store, and a third if they’re by neither. Smartphone deals, unlike direct mail, offer up opportunities for buyers to change their location — within reason — to snare a better deal.
For that reason, firms must exercise a bit more caution in the value of the coupons that they provide, explains Sun. “The increased flexibility for these consumers to arbitrage by changing locations puts a restriction on how aggressively the firms can compete with other firms at each location,” she explains. She adds that companies must also rein in their aggressiveness so they don’t cannibalize their own sales if they have multiple locations. “[Those restrictions] actually helps the competitive situation.”
In the end, says Sun, a well-executed mobile coupon strategy can be better than conventional targeted pricing approaches. “From a competitive standpoint, geo-targeting has fewer bad implications than traditional coupons,” she says. “If you use it in the right way, mobile targeting can outperform both non-targeted uniform pricing and traditional coupon targeting.”