Helping merchants to assess the profitability of deal-of-the-day promotions

The ability to calculate and understand the profitability of deal-of-the-day promotions (DoDs) is of vital importance for merchants. It is also challenging because it requires these merchants to consider long-term, cross-selling, and cannibalization effects and select an appropriate discount for the promotion. The authors develop and implement a model as a free online calculator (http://www.coupon-calculator.com) to help merchants to determine the profit they can generate from these promotions. This calculator evaluated almost 3,700 DoDs from the merchants' and providers' perspectives. To gain insight on the expected profitability of DoDs, the authors analyzed 627 of these planned promotions and 30 realized promotions. The results indicate that two-thirds of the planned and all realized DoDs are expected to be profitable in the long term. Yet, DoDs are unlikely to pay off in the short term. The findings also show that unredeemed coupons strongly increase profit, particularly those of the provider.