The Operational Advantages of Threshold Discounting Offers

Simone Marinesi (), Karan Girotra () and Serguei Netessine ()
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Simone Marinesi: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Karan Girotra: Technology and Operations Management, INSEAD, 77305 Fontainebleau, Cedex, France
Serguei Netessine: Technology and Operations Management, INSEAD, Singapore 138676

Management Science, 2018, vol. 64, issue 6, 2690-2708

Abstract: We study threshold discounting, or the practice of offering a discounted-price service if at least a prespecified number of customers signal interest in it, as pioneered by Groupon. We model a capacity-constrained firm, a random-sized population of strategic customers, a desirable hot period, and a less desirable slow period. Compared to a more traditional approach (slow period discounting or closure), threshold discounting has two operational advantages. First, the contingent discount temporally balances demand when the market for the service is large, and reduces supply of the service (preserving higher margins) when the market is small, allowing the firm to respond to the service’s unobserved market potential. Second, activation of the threshold discount signals the market state and the consequent service availability to strategic customers, inducing them into self-selecting the consumption period to one that improves the firm’s capacity utilization. Yet, threshold discounting can be harmful in situations with chronically low demand. In contrast with past work on strategic customers, their presence is advantageous to firms in our context. A calibrated numerical study shows that threshold discounting improves firm profits over a traditional approach by as much as 33% (7% on average).

Keywords: Groupon; strategic customers; group buying; revenue management; business model innovation (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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