Why stores give out coupons & how you can save

Why stores give out coupons & how you can save

Imagine you own a store that sells apples. How much do you charge? If your prices are too high, nobody will buy your apples. If your prices are too low, you might not make a profit.

That's enough of a problem. But you have to account for another thing: Different people are willing to pay different prices.

One way stores get around this is through coupons. Coupons allow stores to charge different prices to different customers by offering some a discount. Ideally, this helps them sell more than they would with just one price.

Coupons aren't that sophisticated, though. Traditionally, stores mail them to everyone and the people who don't mind the hassle of cutting them out score a discount. Ideally, all the people who would have bought the product at regular price will still do so, while the people who thought the product was too expensive will now also buy it with a coupon. But this isn't always how it works.

Price discrimination

Couponing is a form of what's called price discrimination, said Jean-Pierre Dube, a professor of marketing at the University of Chicago Booth School of Business. It sounds insidious, but it's really a technical term for charging different customers different prices. There are lots of different types of price discrimination, from senior discounts at movie theaters to life insurance companies charging different premiums based on your health and other factors.

"What's special about couponing and what makes it a more fair form of price discrimination is, in principle, anyone could find the coupon if they want to," Dube said.

How much can you save?

It all depends on how much work you're willing to do, Dube said.

"Not everyone is going to be bothered to redeem a coupon," he said.

Studies have shown that even customers who receive a coupon for a product in the store don't always end up using it at checkout, Dube said.

Cindy Livesey, founder of LivingRichWithCoupons.com, has been couponing for 10 years. Modern technology, including websites like hers, makes it easy for shoppers to take advantage of deals. Even a "casual couponer" can save 25% on their grocery bill, she said.

"It depends how much time you want to put into it," Livesey said. "It's really up to the consumer."

For example, she said, if you take the time to track sales, find coupons to pair with those sales and buy those sale items in bulk, you can cut close to 75% off a typical grocery bill.

How has couponing changed?

Couponing was a more analog business when Livesey started out. Shoppers have more leeway now to print out their own coupons and use digital rebates.

But stores also have much more data on shoppers, Dube said. For example, many grocery stores contract with a company called Catalina to print out coupons at the register based on a shoppers' purchases.

Stores are increasingly finding that the easiest way to reach customers is through their phones. When Dube travels internationally, he's noticed that once he lands, he sometimes gets a text message offering a deal on short-term cell service. Various industries, from automobiles to restaurants, have begun using ZIP code data to send discounts to people's phones.

As stores collect more and more data on shoppers, they'll be able to more accurately forecast exactly what you'll be willing to pay and offer you a coupon perfectly tailored to your preference. This way, sellers will get closer to being able to charge every person a different price. This is great news for sellers, but may not be transparent for shoppers. In the future, we may all have to do more detective work to make sure we're getting the best prices when we shop.

Want more money-saving tips? We've got a crib sheet to couponing right here.

Image: Topalov