BrainTrust Query: Seven Reasons Retailers Shouldn’t Use Coupons
Through a special arrangement, presented here for discussion is a summary of a current article from the Retail Doc blog.
One of the things I typically do as a retail consultant when I take on a new client is to discontinue discount marketing programs. In fact, I often raise their prices to help them become profitable.
Untrained marketers who say we need to do something always go the easy, let’s discount way. But just because people redeem them, doesn’t prove coupons built your business. Yes, FSIs are getting higher redemption rates but that is because there are literally thousands of places to find them, from mommy blogs to cottage industry online coupon aggregators.
Here are seven reasons offering coupons to people who don’t know you shouldn’t be used for your marketing:
- Coupons are looked at as an ongoing effort. In effect, they become the marketing plan.
- By the time you account for the time spent creating them, printing them, distributing them, factoring in the actual discounting itself, potential confusion at the registers, etc, you may have a very expensive promotion. Unless a manufacturer is subsidizing it.
- You have taught the customer that your product is not worth what you priced it at. In fact, you may have given the impression you are overpriced.
- The customers who found you through coupons will wait for your next one.
- You are rewarding people who probably have no relationship to the success of your business.
- Your sales staff will keep a copy of the coupon to offer to their own customers or friends.
- If your regular customers who have supported you find out someone who’s never been there is getting a better deal than they are, they just might not return.
That’s precisely what happened at a local restaurant in Long Beach, CA where a group of us went for a birthday celebration.
When the couple at the table next to us paid their check with a 50 percent off coupon from an Entertainment Book, we overheard the owner tell them how he valued the coupon book because it brought in customers who had never tried the restaurant before.
The coupon bearers told him they were from Pacoima, an hour’s drive away, and would never have come without the coupon. He smiled, wished them well and said he looked forward to seeing them again.
Our table was incensed!
We lived in the neighborhood. We’d gone there for years, paid top dollar and received no special recognition. We never went back.
What to do instead?
Reward those who buy from you 24/7, 365 days a year. Coupons or special discounts reward them for their loyalty.
Getting only the coupon users who shopped with you on your preferred list misses the point — they’ll just wait for your next discount.
Discussion Questions
What is your opinion on the effectiveness of coupons for retailers? Are the increasing number of coupon deals aimed at attracting new customers only an irritant to a store’s most loyal customers? What are the best alternatives to coupons?
I have to disagree with a number of the recommendations made in the article. Coupons can be effective tools to draw in new customers, cause sampling of new products and build short-term spikes in sales. They should not be offered all the time, otherwise a retailer will train its customers not to buy anything that is not heavily discounted.
In place of coupons, retailers can offer added value promotions, volume promotions and loyalty rewards.
Retailers have a number of tools at their disposal. Each should be evaluated to its short term effectiveness and viability before before being offered to consumers.
I assume Mr. Phibbs would also consider things like store cards used for retail reductions to be some sort of coupon vehicle. In this format, it may be true that the consumer will randomly move from brand to brand based on price rather than loyalty. But the flip side is that very few retailers have successfully presented a clean solid EDLP program that consumers get excited about. What could be used is purchasing incentives: things you see during the holidays — purchase $200 and get a free turkey, for example.
These programs seem to at least build store loyalty when this is an on-going incentive for repeated action. In this context, I think they can be very successful
If we eliminate coupons or loyalty cards, customers would be able to compare conventional grocers to stores like Walmart on an apples to apples basis and will probably lose. Coupons and loyalty card gimmicks help make the customer think they are getting a good deal. Otherwise, they will simply notice prices are cheaper at Walmart and the retailers will lose them.
Coupons and gimmicks get them in the door. Sure, you lose when smart shoppers cherry pick you but most people are not that smart. Otherwise, the plain vanilla grocery store would already be extinct.
Many large sterile grocery chains can’t possibly compete on customer service and can’t possibly compete on price. That pretty much means coupons, gimmicks, fuel perks, or any other kind of diversion that keeps the customer from focusing on bottom line price.
Coupons are a great way to induce trial. The mistake the restaurant in the article made is that it provided coupons to people who are not likely to become regular customers. The restaurant owner could have lessened the negative impact by offering free desserts or some other reward to those customers that frequently eat there. A simple loyalty program would have handled the situation. As Max indicated, retailers have lots of tools at their disposal and should make use of a variety of them to different purposes.
Bob is absolutely on target. Whether you look at this coupon process from a psychological or economic perspective, it’s a self-inflicted wound. The French etymology of the word “coupon” includes the concept of “a blow.”
My barber started giving the “regulars” a small key tag thing that gives us a $5 discount. You just show it and the $5 quietly disappears. Why can’t a store track who shops there X times (you can define “regular customer” any way you want) and as an appreciation, do something like this? That could well go viral and and make other customers want to earn “one of those”!
Once a consumer brand starts to use coupons, then indeed the brand has started the process of teaching the consumer that the product is not worth what we priced it at. And from that point forward, the consumer perceives the regular price as being “over-priced.”
Special offers for new customers are always irritating to existing customers, but the likelihood it will have a significant affect on their loyalty is low. Retailers should make sure they have a healthy loyalty program to ensure existing customers feel valued, as well as incentives for new ones. They also need to realize a lot of “new” customers who respond to promotions will not repeat their business.
Most supermarket coupons are product- or, at least, brand-specific and are generally underwritten by suppliers. The example in the article is from the restaurant industry. I don’t think this is a similar marketing strategy. Retailers have long known that rewarding loyalty and frequency is the best way to reward their best shoppers. Techniques for getting a new customer into any type of business establishment are on the rise (Groupon, Social Living, etc). The errant restaurant in this example could send best customers a coupon on their birthday. Several of mine do. Seems like a good reward technique for that industry.
I believe that the use of coupons must be evaluated separately for each channel and retailer, based upon competition, consumer expectations, and the positioning of the retailer. In supermarkets, with coupon usage continuing to accelerate, it would be difficult for me to imagine their discontinuation. For many retailers in the supermarket channel, even their most loyal shoppers are using coupons and looking for good deals.
However, even in the grocery channel, coupon programs that do not connect to broader, more sustainable offerings of the retailer are a mistake in my view. With systems and technologies in place, most retailers can target coupons to specific customer segments, and react intelligently to coupon redemption with other offers or introductions to more margin friendly categories and services.
As an example, one application that has proved to be effective is “stacking” of manufacturer coupons with the specific deals the retailer offers, creating a great deal for the shopper, but getting the brands to subsidize a significant portion of it. But using the resulting redemption data smartly to build more profitable long-term loyalty with the redeeming consumers is really the end game for coupon driven promotions, otherwise they are likely not to be effective in sustaining long term profitable growth.
Many of these are pertinent points. However, most people don’t really think about their coupons. As a manufacturer, our company goes to the next level and offers our retailers the best possible solution…dead net pricing. This drops our product to the lowest possible dead net, and strips away any of the confusing financial issues or hidden marketing agendas which actually cost everyone more money, time, effort (resources) and increase the consumer’s confusion. By eliminating all ancillary marketing and discounts, we empower our retailers to manage their products the best way they know how, and this usually includes NO coupons.
It’s wonderful to see someone espousing the fundamental philosophy of earning business versus buying business. Everything I have ever read or heard from Bob Phibbs makes it clear that he is a passionate supporter of that philosophy and retailing needs more of them.
With regard to coupons, consumers tend to be coupon users or not, with those who do use them segmented into the casual users, conscientious coupon collectors and “extreme couponers”. Understanding where your core customers fall on that scale can influence your strategy as a retailer. If you have a predominance of coupon users shopping your stores, then coupons are in fact rewarding your best customers through their preferred medium.
If you don’t have customers who fall into that realm (like my family, and I’m guessing maybe Bob’s), then the situation like the restaurant incident Bob described may be happening all too often in your stores. You are simply renting “cherry pickers” for a one night stand. Was that good for you?
Even as a senior citizen, I question the rationale behind the senior citizen discount. I’ll take it — no sense leaving that money on the table, but a family with 4 kids probably deserves/needs it more. Note to self — avoid the kid’s eat free nights at restaurants.
As usual, Bob builds a compelling argument. The only things I would add to this is the narcotic effect coupons and price promotions in general have on both planning and the quality of the product offering, be it food or apparel or anything else.
Once you put in a “successful” coupon, you will have to offer it again to just meet the LY sales number when you anniversary the date. Then the typical reaction is, “Well, we need to add another to build sales.” Over time, the only way to build revenue year over year is to keep adding coupons. All these discounts mean lower margins and profitability which leads to decisions to lower costs, which results in lower payrolls (lower service levels) and product costs (lower quality).
This is the path the department stores took over 30 years ago and now there is basically one department store left standing that books 85% of their sales on discount.
I think we need to differentiate between the types of retailers we’re discussing, and the types of products they sell.
If we’re talking about the major national retailers and the commodities they sell, then coupons are just another way of promoting and discounting. For those retailers, and that merchandise, the game is all about price, price, price, and coupons are an important part of the toolkit.
But for independents (and I believe Bob’s point is primarily directed at independents) who sell discretionary specialty merchandise, maintaining price integrity and full margins is an essential element of a sustainable strategy. The value proposition must be built around the totality of the offering and experience, not just the utilitarian calculation of the lowest possible price.
It seems he is suggesting loyalty cards and not trying to drive new business with coupons. This can be effective in taking care of existing customers but you would need to promote it to try and get new customers.
Growth comes with new customers so it seems to be a plan to be happy with what you have.
Coupons and similar discounts don’t always pay out. But planned thoughtfully, they can indeed drive higher sales and profits. Using the restaurant example above, here are 6 conditions that support coupons:
1. Increment. Setting offers with COGS and ACS (average customer spend) in mind protects profits. Setting the value of the offer below the ACS gets patrons to spend more. Requiring a minimum spend ($20 off $50) further protects margins.
2. Timing. Restaurants are fixed cost businesses. Down time can be costly. What started with Happy Hours is now a mobile-enabled concept that can be activated during any slow time. Businesses like Think Near and others have developed impulse coupon programs triggered in advance or real-time.
3. Products. Giving discounts on higher margin products like beverages — especially beer, wine or spirits that would not have otherwise been purchased — creates perceived value without causing losses.
4. Requirements. Getting customers to buy a package they wouldn’t normally buy actually creates funds for discounting. A “2-for-1 appetizer with the purchase of an entree” is one example. Requiring gratuity serves wait staff.
5. Situations. Grand openings require special means to attract customers. All customers are new. Businesses start from a baseline of zero and will stay there without incentives. New openings or relocations are similar.
6. Loyalty. Bob, Dan and others in this forum have well demonstrated this point already.
Impulse purchases often can’t be reversed (thus “caveat emptor” doctrine). Poorly planned coupons are irreversible (“caveat venditor”).
Generally, and when used properly, coupons are an effective tool in the marketing mix; coupons encourage trial, bring new business, incentivize multiple purchases, reward loyal customers, and generally contribute to a proper marketing plan. When used as the sole vehicle, they are a desperate attempt to artificially increase sales at the expense of profit margins.
I do believe coupons have a function within the marketing mix. I also believe the ROI needs to be well defined and in rare exceptions, it can be the only marketing vehicle.
While I appreciate Bob’s frustration, and I’ve been in Bob’s shoes a couple of times, it’s not enough for me to stop patronizing a business, especially a small business. I might find myself suggesting options to the business owner or I will find the source of the coupon and use it in the future.
Discount coupons can be very effective for introducing people to a retailer or a product. They are often better than pure price reductions because they have advertising and reminding value. Smart marketers know how to use the other effects from coupons beyond price discounts to make coupons a valuable marketing tactic.
I’m with Bob Phibbs on this, and note the comments on suppliers funding couponing. I wrote about P&G’s efforts to abandon couponing some time ago in “No, the Customer is NOT Always Right!” The general rule is that paying customers to buy is evidence of a lack of selling skills, and any promotional pricing that is not founded on reduced costs is not rationally sustainable.
I note that both of the superstars of “bricks” retailing (A&P, a century ago, and Walmart, several decades ago) were founded on blowing out costs and inefficiency, first in their own operations, and then in their supply chains. Forcing reduction in supply costs without stimulating supplier efficiency is not rationally sustainable. It’s easy for predatory shopper attitudes to get passed back up the chain as predatory retailer attitudes — get the supplier to pay for the coupons and cut-prices. But predation is NOT sustainable.
This is not to say that temporary price reductions, justified by temporary market conditions, either in supply or demand, are irrational. However, the efficient market hypothesis applies to Main Street, as it does to Wall Street.
While eliminating coupons may be an academically correct approach to restoring customer perception of value, in this economically challenged environment, the answer may be more complex.
The easy answer is this: decrease your couponing and increase the points rewards from your loyalty card. In this way, you make sure to reward your better customers more than your less loyal ones.
But the answer, as I mentioned, is more complex. Certain segments of your frequent customer base may still prefer “the hunt” and a feeling of accomplishment that comes from finding a bargain. Other customers may require a discount to incent them to try a new product or service. Finally, even your best customers are being barraged with coupons from your competitors. If you do not match the discounts, some of your frequent customers may be enticed to try your competitor — which you most definitely do not want.
The nuanced answer is that some level of couponing, when tightly targeted with the right offers to the right customers in the right channel at the right time, is a valuable piece of the marketing mix. Try to stand on principle and you may very well fall prey to less-principled competitors.
Mass discounting leads to three distinct buckets of waste. This includes subsidization waste, targeting waste and opportunity waste. I’ll break down each with an example.
Subsidization waste would be giving someone a discount for something they were going to do already. This type of waste has been well documented through the years with FSIs, trade deals, and most recently, daily deals. My family has a tradition that we go to the same restaurant every Friday night. I recently saw a Groupon and purchased 5 of them. We are still going every Friday night, ordering the same amount of food, but now it’s less expensive. (Incidentally, it is about 15% less expensive due to the maximum discount versus the 50% as advertised).
Targeting waste is paying a media fee to give a coupon or message to someone that has never and will never purchase in the category. It is disruptive, creates clutter and is wasteful spending. I am not in the market for furniture in my house yet I constantly receive expensive catalogs and discounts because we were in the furniture market a year ago when we moved.
Opportunity waste is rarely discussed. This is when you get to the right person but deliver the wrong message. My mom loves a great deal. If you are a department store and you let her know about your great prices, she will take a look. Let her know you carry Coach or Prada and she will never, ever enter the door. Others want the high-end experience, customer service and brands. Shopping for deals is just a turn off. Delivering the right message will drive customer engagement.
Increasing access to customer data will improve targeting, relevance. Electronic media is making performance based media a reality. These trends will not only drive retailer efficiency and effectiveness of spend but also be a great win for consumers. Consumers want to information and offers, they just demand relevance and value.