Small business owners often wonder if coupons work and many times business owners get frustrated when they feel they have to offer coupons in order for a person to try their product or service. “Why?” They ask. “Why do I have to discount my products, it’s already tough enough”, they often complain.
This happened to me today. I saw a coupon for $30 OFF a music lesson, first time clients. As my son had been asking for guitar lessons for some time, incentivized by the coupon, I decided to call and get him a lesson. When I called to book the class, I told the lady on the phone about my coupon and she said she’d put in the system so that the billing department would apply it at the time of payment. A day later, I had to call the company to confirm my address and give them payment. The lady on the phone (now a new lady) told me that I had to pay an enrollment fee plus an entire month of classes (about $140 total) in order to redeem the coupon. I was angry! I told her that the prior lady had known about the coupon and had told me nothing about that. She proceeded to say that that’s the way those coupons work and that they’ve been in business for 25 years and they would not be in business if they would just give the first class away. I was shocked. I said to her that there is no worse feeling than getting upset with the company you are about to do business with, even before they take your money. She politely said she understood. Needless to say, I cancelled the class and went online, and booked another teacher for my son in about 10 minutes.
I kept wondering how it was possible that this woman lost a potential client that was probably worth between $250 and $550 (lifetime value), considering that the company was already prepared to give $30 with the coupon!
The truth is we live in a place where coupons and offers are a must for a small business. The reality is that for most, it takes a good offer to get a person to come in for the first time, and then it takes both a good product and good service to keep the customer from leaving to a competitor.
Coupons Encourage Customers to Try
The goal of any offer or coupon is to encourage the consumer to try the product or service. Although we would want the consumer to try our product just because our ad looks amazing (note tone of sarcasm), the truth is the consumer needs an incentive to depart from their current habits and try something new.
If your “redemption rate” is not high, then your offer is not good enough. So the question is: How much should you discount? The answer is: you have to run the numbers.
Here’s an example:
This example includes 3 scenarios: 2 with a $30 coupon and one with a $50 coupon, and it takes into consideration redemption rate (in this case number of calls). If you look closely, you can see how the amount of calls you get directly affect the ROI of the promotion, and after only one month, only 2 of the 3 promotions look profitable. However, if you take into consideration lifetime value of the customer, then all 3 promotions look profitable.
So even if an offer looks like a losing proposition at face value, when you do a financial model, you will be able to tell if an offer is profitable for you or not.
Note: a key component of this model is cost-per-call. If you don’t know this number (cost-per-call=amount spend on marketing tactic / number of calls received from that tactic) then you need to find out what it is! This calculation should be done per every marketing tactic you use (money mailer, direct mail, tv, radio, Google Offers, Yelp Offers, Groupon). Each marketing tactic has a different cost-per-call and knowing this for all your marketing activities will help you allocate your marketing budget more wisely. However, the only way to find out the cost-per-call is to track calls. Many people say they ask their customers “how did you hear about us?” but this method does not yield very reliable data. Instead you should use a vendor that specializes in call tracking. Some of them are FREE and most are inexpensive. If you don’t do it now, you should definitely try it. I assure you will be surprised at the effectiveness (or lack thereof) of your marketing tactics.
Tracking calls is even more important if your marketing budget is sizable. Franchise coops, for example, are made up of a group of franchisees who pool their money to advertise locally as a group. As a result, their budgets can be large (maybe $10k or $20k) and because they can divide the cost of advertising among the group, they don’t always pay much attention to the ROI for their particular location. If you’re business is part of a franchise, then read more about how to make franchise advertising more successful.
The If’s and But’s
Many business owners seem to forget that the purpose of a coupon is to entice people to use them! Many offers seem like the owners don’t really want people to redeem them. This is what I call the If’s and But’s of coupons, or in more common words, the disclaimers.
Some coupons seem to read “…. come try us out! … but only if…, and only when…., but not with…”. I the case of the guitar lessons place it was “Get $30 off, but only if you sign up for a full month and pay a registration fee of $35”. Basically they wanted me to sign up for $175 to give me $30. It’s like if Costco made me buy 2 lbs of gruyere if I wanted to try their samples at the store!
So why couldn’t they just offer $30 off the first class? Simple! If their product is worth it, then I’ll become a customer, right? If what they are saying is that they are afraid that I will try it and leave, then what they are really saying that their product is not good enough for me to remain a customer!
The ladies from the music school actually said that they could not give a class away because people would just take the class and leave, and that they would be out of business. Really? I didn’t know you could learn how to play an instrument in one class! Most importantly, is that what most people would do? …. Take one class and leave and go to the next teacher until you’ve exhausted all the teachers in the area and hopefully by then you learned something!?!
A few months ago we got a coupon for ½ off to an Indian restaurant. We’d never been to it, but we decided to try it. The food was great, the service was great, and when it came to pay, we gave the waiter our coupon and he not only gave us our discount, but told us to keep the coupon and use it again another time. Now, this restaurant has become one of our favorites and we go there about once a month!
The Lifetime Value of a Customer
The key for a business owner to “feel good” about a coupon (even though it’s NOT about feeling good but about making money!) is to know how much a customer is worth. The typical customer is not just worth the amount she consumes on the transaction that resulted from the use of the coupon. In a restaurant, for example, the value of the customer is not just that one meal but maybe 3 or 4 times that amount, because that customer will likely come back (assuming the product offering has value add).
In the case of the guitar lessons, the customer is worth a lot more than one class since typically you’ll end up taking many classes in order to learn to play. Maybe a customer is worth $840 (6 months of classes at 4 classes per month). I doubt that they would go out of business if they gave away a free class!
The Fear of the Coupon Shopper.
Is your product or service a commodity? Probably not! So if you’re afraid of getting only the coupon shopper to redeem your offer then you are not presenting a good and sustainable value proposition. What is it that makes your business better than your competitor’s? Hopefully your answer is more than “I’m cheaper!”
The reality is that there are coupon shoppers out there, and certainly there are industries that are more prone to coupon shoppers than others, but for the most part, people use coupons to try products and services out, and if yours is good, they’ll stay!
Is My Brand Cheapened by Coupons?
Oh… the brand dilemma. Look, direct response marketing is NOT the same as Branding. Branding is achieved over a long time, but a coupon has the goal of bringing a person in to your business today. The coupon or offer has almost nothing to do with branding. Every business can benefit from having an incentive for people to try out their products. Even high-end brands! For example, do a search for “Jaguar Offers” and you get a large list of dealers promoting offers to try to get you to come in to the dealership! Nordstroms, Neiman Marcus, Giorgio Armani, Mercedes-Benz, they all offer coupons. So if it’s good enough for Mercedes-Benz it’s good enough for you!
Be Where Your Customer Are
You do have to take into consideration the venue that you’re using to advertise your offer. For example, there is direct mail – money mailer, RSVP, Valpak, red plum – and others, there are Google Offers, Facebook Offers, TV offers, Groupon-like sites, Yelp, etc). Coupons can be shown online or offline. So you should think about your target market and where they are more likely to see your coupon so that you get the best chance of getting the right person to try your product. I don’t believe I’ll be able to find a Mercedes Benz offer in the latest issue of the Penny Saver!
At the end of the day, what matters is that people actually redeem your coupon, try your product and stay as customers from thereafter. But remember, do your homework, calculate cost per call, and make sure you understand the value of a customer before you get going on your campaign.