This is a guest post by Mr Credit Card. He saw my article on the ethics of stacking coupons and wanted to share his thoughts on them, and they’re very thought-provoking. Definitely check out his site before you apply for a credit card, because it’s chock-full of useful info to help you decide on the card that’s right for you.
A few weeks ago, Cathy wrote a post about the ethics of coupon stacking. At the time, I was reading a book calledWhy Popcorn Costs So Much at the Movies: And Other Pricing Puzzlesby Richard B McKenzie. Chapter 5 was all about the economics behind supermarket and manufacturers coupons. I had thought about writing a review of this chapter on my own blog but thought this would be a better place since Cathy brought up the stacking and ethics issue.
Here is the outline of today’s post: I’m going to go through and summarize the chapter about the economics of coupons and I’m going to share some ideas of how savvy credit card holders use the “stacking strategy” as well. I’ll then conclude with my thoughts about the ethics of coupon stacking. So let’s get started.
Coupons are seldom used? – To anyone who reads coupon or mommy blogs or Chief Family Officer for that matter, this might seem a little ridiculous. But as a matter of fact, very few coupons are actually used. Here are some of the stats:
- In 2006, redemption rate on coupons were a meager 0.8%.
- Redemption rate for peel-off and on-shelf coupons is pretty high, sometimes as high as 50%!
- The author then posed the question as to why do manufacturers give discount. The two common explanations given by economist are price discrimination and peak load pricing.
Coupons and price discrimination – As a backdrop, price discrimination allows the seller to earn more profits by charging multiple prices for the same product to consumers with different price sensitivities than they would if they charged just one fixed price.
While those who use coupons think they are getting a great deal, the sellers, by using coupons, can actually charge a higher price to price insensitive buyers. By going through the trouble of actually researching and cutting coupons, price sensitive buyers declare themselves as such. They also indicate that their opportunity cost of time is not high (they have time to go through the whole coupon research thing). But they also reveal that the other buyers who do not bother with coupons are price insensitive, have higher opportunity cost and can be charged a higher price relative to those who cut coupons. According to studies, about half of the unit products with coupons pads just below the products are bought by folks who do not bother peeling off the coupons at check outs!
The author also goes on to say that coupons are used to
Coupons and Peak load pricing – According to the author, coupons also allow for another type of price discrimination called peak load pricing. Groceries and supermarkets are most busy during the late afternoons and early evenings. During this time, shoppers are usually coming from work and are relatively price insensitive. Those who shop mid morning are more likely to have no jobs or perhaps are stay at home moms. They tend to be more price sensitive and have more time for research. Coupons are a way to cut prices for these price sensitive shoppers. Hence, in the big scheme of things, coupons separate the price sensitive coupon cutter mid morning shopper from the price insensitive evening shopper. By doing so, they also spread the “load” of the supermarket and ensures that a smaller number of check out staff can service the same given number of customers.
Once you understand the logic behind why coupons are issued by manufacturers, it stands to reason that groceries and supermarkets should also give out coupons on top of what the manufacturers give. This way, it enables them to further refine the process of price discrimination.
Economics of Information: some observations about coupons – According the “economics of information school,” prices can vary among products in different markets for a variety of prices. Here are some typical observations.
As you can see, manufacturers have a purpose in mind when they issue coupons, and so do stores. Right now, let me give you some examples of credit card stacking (my area of expertise):
Credit Card Stacking as a couple – Yes, one way to really get great deals is to stack up your credit cards as a couple. The best example I can think of is for a couple to get identical cards for airline miles bonus promotions. Let’s take the Delta Skymiles credit card as an example. Their platinum card offers a 20,000 bonus miles for signing up and you will get it after your first purchase. If both partners get cards, they will get 40,000 bonus miles. This can be done with any card that offers a great reward point sign up bonus. My wife and I just got a pre-approved offer from Capital One with a 25,000 bonus miles sign up! We could simply get both!
Here’s another example of stacking by getting two identical cash back credit cards: Chase used to have the Chase Freedom card, which at one stage, offered 3% rebates on the highest spending categories among the 15 categories that were eligible. Examples of these types of expenses include gasoline spending, supermarket, drugstores, restaurants, utilities etc. Well, guess what did savvy couples do: They got 2 cards, carefully split their spending on the card based on the expenses and earned 3% rebates on 6 categories rather than 3! That’s a double stack! (Note: you can further triple stack your manufacturer’s coupon with store coupons and charging it to a cash back credit card!)
Here’s another example: Some folks get gas credit cards that give 5% rebates on gas and just use the cards for gas and nothing else. These cards have no annual fee and so if the card holder pays in full each month, they will earn a 5% rebate. And credit card companies lose because even the merchant fee cannot cover 5%! They use their other cards for non-gas purchases. Right now, most gas credit cards put a cap on how much rebates you can earn from gasoline spending.
Arbitraging credit card deals – Just 2 years ago, credit card companies were falling all over themselves offering 0% balance transfer credit cards with 0% for 12 months and no balance transfer fees. Well, savvy consumers used these cards to refinance their home equity line of credit. Some even took their deals and invested them for one year at an online bank like HSBC Direct, which back then paid 5% interest! Borrow at 0%, get paid 5% – not a bad deal. But the savvy folks who played this game did not use the card after the introductory period ended! The credit card issuers thought that offering 0% deals would be like offering teaser rates on cable TV and that customers will stick around. The problem for them is that it’s easy not to use a credit card if you do not want to, but more inconvenient to actually cancel a cable installation! Hence, most credit card issuers did not make anything off these offers. These days, you can only get a 0% deal for 6 months and you now have to pay balance transfer fees and they do not cap it as well.
Now let us come to the conclusion of the whole coupon stacking saga:
Coupons provide many benefits
The later part of the chapter spells out some of the purpose that coupons serve producers and stores:
Moral of the Story : DO NOT FEEL GUILTY ABOUT COUPON STACKING
There is no reason to feel guilty about coupon stacking. Manufacturers and supermarkets know exactly what they are doing. They are segmenting the market according to price elasticity. All you are doing is:
From a macro economic standpoint, the “economics of information” school says coupons ensure price competition and lower prices overall than if there were no coupons. So you are doing society good by couponing and (for that matter) stacking.
Also, while coupons have always been around, you never know what may happen in the future with the ease in which the internet allows one to search for them. If more and more people start using them, will that make it unprofitable for supermarkets and manufacturers? I guess at some point that may happen (though it seems unlikely). But look what happened in the credit card industry (i.e., the great deals that are no longer around). Moral of the story is when there is a good deal, take it, because it may not be around tomorrow!