Mind the discount gap – Chris Garner DIRECT Magazine

The promises of upward traffic, soon to be loyal customers and record coupon sales are luring retailers into the exploding group buying site space. Chris Garner warns of the pitfalls, loss of control and hidden costs associated with discounts and shares his tips on how to make coupons pay.

Advertiser beware, the sudden popularity and enormous volume of traffic at Australia’s rising coupon sites may come with hidden costs. If you’ve seen the stories hyping up coupon sites on A Current Affair and in the Daily Telegraph, you will be aware that Australia’s love affair with coupons is starting to get hot. But don’t be tempted to jump on the bandwagon before you have read this article.

Without a solid retail strategy in place, coupons can lead to negative margins on volume-driving products, and a loss of control for the advertiser, especially if the offer goes viral. However, I want to reassure you that a good coupon strategy can be a valuable addition to your retail program. Coupon sites can drive high volumes of visitors and sales for online retailers by tapping into their large membership bases.

Smart shoppers are seeking out coupons before they commit to a purchase, and researchers Frost & Sullivan predict online spending in Australia will top $12 billion this year—although 25 percent still goes offshore.

When done well a coupon strategy has the power to upsell customers to a more expensive item and to offer an improved customer experience. It can increase retailer margins and average transaction value 25 percent higher than pay per click search, according to dgm research from $12 million of sales. They can also help to ship end-of-life warehouse fillers.

Don’t do a Gap

Gap, that iconic US fashion brand, engaged in a coupon offer with deal-of-the-day member website Groupon, that one can argue was a colossal loss for the retailer. For a $25 voucher, Groupon members could buy $50 worth of Gap clothing and accessories. So while the company made a record US$11 million of coupon sales, it also lost $11 million of potential revenue.

There are questions of whether the retailer could measure customer loyalty or repeat business, the time it took to redeem the offer in stores, not to mention they had no control over the viral offer—and Groupon takes its cut. In fact many believe that the customers who took advantage of Gap coupons were price-sensitive shoppers who would not normally spend at the retailer.

Industry pundits are doubting whether Gap made any profit at all from the exercise, though there is no doubt they made huge headlines around the US.

Every day more companies jump on the coupon bandwagon with ill-advised strategies that not only devalue the product offering, but also go beyond what is sustainable as a business. The belief that offering a discount as an incentive to trial a product will lead to future full price sales is not universally true. In fact, in our experience working with retailers to devise coupon programs, it is rarely true.

Offering periodic discounts serves price-sensitive customers (which is a different strategy), but it can devalue a product in customers’ minds, and subsequently impede future full-price purchases. Our extensive experience has led us to develop a range of coupon strategies with our clients that are not discounts, but rather, upsell techniques.

As marketing author Seth Godin says: “Loyalty is what we call it when someone refuses a momentarily better option. If your offering is always better, you don’t have loyal customers, you have smart ones.”

Make coupons pay

A coupon offer should achieve the following, in order:

• Increase margin on sales

• Improve the customer experience through upsell

• Incentivise loyalty and repeat purchase

• Offer enticing product bundles

• Offer free postage

From pizza to consumer electronics, this is a strategy that works. We have been devising coupon strategies for more than two years, across a wide variety of categories, which has helped us to formulate a set of guidelines that, if adhered to, can make you money from your coupons.

• Use coupons on high margin products. Don’t discount your volume drivers, use coupons to offer customers your higher ticket products or product bundles. This will ensure you never devalue your core products.

• Structure offers like this: “X percent off when you spend $Y” where X gives you an increased net margin compared to your average order margin.

• Use coupons for upselling—always take the customer up the product range and thus improve the customer experience.

• Plan for you coupons to go viral. The very nature of coupons means that the coupon sites are community driven and offer powerful word of mouth referrals. Good offers resonate, creating a ripple effect that can generate excellent user generated content.

• Ensure your online checkout can reject inactive coupons. Most coupon sites do not remove out of date coupons, similar to the way old blog postings don’t disappear from Google Index. It’s your responsibility to make sure your checkout functionality has the ability to reject out of date coupons.

• Set expiry dates and unique identification to measure redemption—to create a call to action a coupon must have an expiry date and ideally a unique identification number so you can track back exactly where the coupon has come from.

• Protect yourself by having stringent terms and conditions. For example: can only redeem one per household, only available to the first 50 participants etc.

Armed with these fundamentals, hopefully you won’t do a Gap and blow a potentially massive amount of revenue with the wrong approach to coupons.