The Optimal Face Value of a Discount Coupon.

The paper analyses the decision made by firms to issue one-time coupons as a means of attracting new deal prone customers. Given the structure of the market and the share of loyal customers, we derive boundaries for the value of the coupon, as well as the optimal face value of the coupon. The main variables that determine the coupon value are: the size of deal-prone and loyal market segments, the initial profit margin and the coupon's processing cost. We show that the optimal share of discount out of the profit margin per customer should never exceed the customer share of the deal-prone segment.