A coupon offers a user a discount on the purchase of a product, either in the form of a “% off” or a “$ off” or in the form of a “Buy One, Get one free” (BOGO) offer or a co-promotion (Buy X, Deal on Y). Conventional wisdom maintains that coupon discounts promote sales as they lower the economic cost to the consumer. This increase in sales is expected to make up for the reduced profitability of a single transaction. This paper shows that offering an economically more attractive coupon may not increase sales, as consumers use the (higher) value of the coupon to infer that the product is higher priced. The inference of higher price reduces the attractiveness of the transaction to the consumer, leading to deep coupons not necessarily increasing purchase intentions. However, if the higher price inference is also followed by a higher quality inference (when consumers believe that high price Þ high quality), then deeper coupons may lead to higher purchase intentions once again (as consumers would be willing to pay more for a product they believe to be of higher quality).

The conditions when a coupon’s value is informative of its price and quality are contingent on contextual factors. We examine two contexts that abound in the actual market place: differences between coupon drops that include price/ offer details of one (versus more than one) item in their product line; and differences in the range of prices (and coupon values) offered by competitors in the industry. For example, coupons offered in coupon booklets will be more likely to be evaluated alongside other competitors’ coupon offerings, whereas those offered in standalone print advertisements will be less likely to be so.

Three experiments show that high coupon values are more likely to translate into improved deal evaluations and purchase intentions when unfavorable inferences about price and quality are not drawn. Study 1, manipulating the coupon value ($2 versus $4 per ticket) of a Barnum & Bailey show in New York (cross promoted with the New York Subway), shows that when the price of ring-side seats at the circus (to which the promotion was not applicable) was not stated, they believed the price of the tickets was over 40% higher when the coupon was $4 versus $2. Intentions were not higher despite the doubling of the coupon value. On the other hand, when the circus specified that the ring-side seats were priced at $30, the price inference was not made, and the $4 coupon led to higher intentions. These types of cross-promotions are fairly common (e.g., Coca-Cola cans and Six Flags Marine World). Results of this study suggest that when the coupon offer is a deep one, providing a price anchor (such as the price of a product where the deal is not available, the Manufacturer Suggested Retail Price etc.) would impede the formation of the price inference and allow the deeper coupon value to improve intentions by improving the economic value of the transaction.

Study 2 shows that the contextual price points that a consumer can use (instead of coupon value) do not merely have to be present, they also have to be diagnostic of price. The experiment manipulated the range of prices for tourist attractions in a foreign country that all use “Buy One, Get One Free” offers (BOGOs). When the set of competitive prices have a large variance they are less useful to compute price, and coupon values may be used instead. The study also showed that, in these cases, where consumers are unaware of the quality of the product/ service, their price inference carries through to a quality inference. Therefore, the deep coupon value is effective at increasing purchase intentions, despite the price inference, and this is because of the indirect effect of coupon value on quality perceptions.

The effect of competitive variance (Study 2) and the effect of the presence of alternate price information on the coupon (Study 1) are replicated in Study 3. This study uses a commonly couponed category with a high frequency of use among the experimental participant: pizzas.

One implication of this paper is that deep discounts may not necessarily increase sales, and may only erode profitability. Understanding the effect of coupons on perceptions of regular price provides managers with a simple and cost-effective way to minimize deleterious effects: when possible, provide information regarding regular prices (such as MSRPs, or prices of non-promoted lines) along with a promotional offer.

Theoretically, we demonstrate that offering coupons to consumers to encourage trial (low-price awareness scenario) may lead to higher price expectations, without a positive effect on trial intent. Sales promotions undoubtedly provide an economic incentive for consumers to purchase a brand. This paper explores whether they serve a secondary function -- an informational aspect: the informational value of a coupon moderates its economic value. We show that the coupon value effect can be found even when alternate sources of information are available (but not very diagnostic); that the effect on price perceptions percolates to quality inferences; and the combined effect of coupon value on price perceptions and quality inferences affect deal evaluations and intentions.