UConn Researcher Finds ‘Mobile Geo-Targeting’ Can Be a Powerful Tool for Business Growth

With the typical American consumer spending three hours a day on a smartphone, savvy companies are quickly trying to capitalize on new technology that allows them to market their businesses electronically.

Move over billboards, newspapers and coupons delivered by mail. The new kid in town is ‘mobile geo-targeting,’ location-based services that promote companies and discounts directly to a customer’s mobile phone.

“Mobile geo-targeting is a new, exciting, emerging phenomenon that can be used by all businesses, large or small,” said OPIM professor Xinxin Li, whose research on the marketing tool is pending publication in Marketing Science. If done well, this new business-generating approach can be a powerful tool for business growth, she said.

Some 200 U.S. companies—ranging from Adidas to Pinkberry frozen yogurt to Walmart and Outback Steakhouse—have developed marketing campaigns that include mobile geo-targeting. Global mobile ad spending is projected to reach $94 billion in 2018.

“Our research offers important managerial implications for firms to optimize their mobile geo-targeting strategies,” said Li, who collaborated with professors Yuxin Chen of New York University and Monic Sun of Boston University.

In the past, businesses would collect new customers by sending coupons to their home. But today that fails to reach a more mobile society, in which people may live in one area, while shopping, attending school or working miles from home. Also, Li said, there are distinct profit disadvantages for companies that select to cut their prices across the board.

Mobile geo-targeting is the practice of firms targeting consumers based on their real-time locations, using one of three approaches. Payment apps such as Google Wallet or Apply Passbook pull coupons from participating vendors based on the consumer’s real-time location. The shopper is then presented with a bar-coded coupon on his/her home screen.

Another way to use geo-targeting is to send location-based coupons through short message services, which users opt-in to before receiving. Another option is for companies to run a dynamic banner ad that links to location-based coupons.

When consumers were asked what information they are most likely to respond to in a mobile ad, the highest answer is discounts/sales.

Mobile geo-targeting, if done well, can result in a firm netting a higher profit because companies can more carefully disseminate coupons and other incentives. For instance, a coffee shop can send ads to people walking by to invite them in for a beverage, or send coupons with deeper discounts to people wandering near its competitors to make potential customers aware of good deals nearby.

This capability to offer differential pricing based on real-time location provides opportunities for firms to design more flexible targeted pricing, but also presents challenges, Li said. As consumers get more mobile and more informed about these mobile offers, some of them who are not supposed to be in the targeted group for a coupon may travel to the location that offers the coupon to receive and use it over their mobile phone.

Unlike other research on the subject, Li and her colleagues focused on the impact of consumers’ mobile deal-seeking behavior in competitive business environments. They show that firms can, in fact, benefit from this deal-seeking behavior in a competitive market.

Their findings included the following:

• A firm’s ability to price discriminate helps it expand demand, without having to charge lower prices to all customers. This model fits best with non-necessity products with a reasonably high demand, such as movie tickets and snack foods, which a consumer may not purchase without an incentive. Coupons on these small-value products can be attractive when the consumer only has to travel a short distance, Li said.
• Geo-targeting can relax intense competition in each segment of the market, with traditional targeted pricing creating a “prisoner’s dilemma” in which every firm is worse off. When enticing mobile consumers, firms need to balance prices across different consumer segments, based on location, to avoid intra-firm cannibalization. This incentive ultimately relaxes competition between firms. But with traditional coupons, which are typically inaccessible to people who are not targeted, this incentive to balance prices across locations disappears.

“Taken together, our analysis shows that mobile geo-targeting, as a unique pricing mechanism, can benefit firms in a competitive setting,” she said.

The research findings have important managerial implications for marketers who aim to optimize their mobile geo-targeting strategies. Managers should carefully trade off the benefit (such as increased demand) and the cost (such as cannibalized sales across location) of mobile geo-targeting when compared to uniform pricing, Li said.

The change from residential location to mobile targeting has both benefits and disadvantages. “On one hand, this enables firms to design more flexible pricing strategy, but on the other hand, it allows consumers to pick deals targeted at other consumer segments more easily, potentially making the targeted pricing ineffective,” she said.

“Companies should encourage more consumers to become mobile-deal accessible only if mobile geo-targeting is beneficial, which tends to occur when the typical customers’ willingness to pay is low, the transportation cost is high, and consumers’ taste preference is weak,” Li said.