Research Details

Abstract

Among the limited ways for small service providers to balance demand and supply, launching temporary consumer offer may be attractive. However, relatively little work has empirically examined whether and how such offers pay off service providers. In this paper, using a comprehensive dataset from two leading deal platforms in China, we empirically study a new business model: the online deal. Service providers, who face predictable demand swings and capacity constraints, launch online deals for customers to prepay online and redeem later in store. Using a structural model, we show that online deals effectively facilitate demandsupply coordination through two levers, the discount and, more interestingly, the advance sales period. To our knowledge, using the advance sales period as revenue management tool has not been studied in the literature. Tailored to demand fluctuations and the service provider’s operating margin, the advance sales period and the discount serve two operational roles to achieve profit maximization – smoothing demand mean and reducing variance-related costs. Furthermore, our model estimates enable us to quantify the operational value of the online deal. Via counterfactual analyses, we show that by using these two levers instead of solely a discount, 82.1% service providers see a mean profit improvement of 23.6%. The additional lever, advance sales period, helping to mitigate the extreme discounts is likely where the profit boosts come from.

Type

Working Paper

Author(s)

Martin Lariviere, Simin Li, Kejia Hu

Date Published

2019

Citations

Lariviere, Martin, Simin Li, and Kejia Hu. 2019. Promotional Design for Small Businesses: The Operational Value of Online Deals.