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Coupons are a big deal. According to a recent Inmar study, 92% of shoppers used a coupon in the last three months, and there were 321.3 billion manufacturer-funded coupons distributed in 2015 alone. Not to mention the numerous retailer coupons that flood the marketplace. But does that mean all brands should be using coupons regularly in their mix?
IS YOUR COUPON STRATEGY PROFITABLE?
To know whether or not a coupon strategy makes sense, it all comes down to objectives. Consumers are fickle, and many brands fall into a price competition trap in the marketplace. Coupons and similar price promotion tactics get a brand one thing: market share. Consequently, brands grandfather their coupon programs back into their budget each year, and artificially rent volume and market share on an annual basis. This comes at great cost, and there are serious negative consequences as it relates to profit.
There is a common misconception that coupons help create loyalty. Coupons reinforce loyalty to the deal, not the brand/product. Once the coupon ends, brands without meaningful inherent value (or points of difference) see alarming volume declines. This often results in a business decision to reinstate promotions, and the cycle continues.
I’ve worked on a number of brands that use substantial coupon and price promotion tactics. In each case, I worked with Customer Marketing, Sales and Finance to model the effects of these programs. Without fail, every test showed the same result: coupons and temporary price reductions drove volume but not profit. The ROI just wasn’t there (except for rare exceptions which I’ll get to below). There are a number of reasons why. I’ll mention just a few here.
First, the promotion often leaves money on the table. Yes, it brings in a certain amount of incremental purchases (increased share). But, the promotion also gives that very same discount to those who would have bought the product anyways, regardless of the promotion. This creates huge losses that usually offset any new profit from the incremental customers.
Another reason the promotions lack ROI is that they are often initiated with the intent of creating lifetime value, but not executed correctly over time. Brands will give an initial discount to get new consumers into the franchise. But, instead of making the promotion temporary and reaping a lifetime value benefit, brands grandfather the promotion and repeat it each year (use it or lose it).
If you can’t build a sound mathematical model that shows a bottom line benefit, you need to make a significant change. You should either kill your coupon strategy or at the very least change it to something that actually makes your brand money.
GOOD COUPON STRATEGY, WHEN IT MAKES SENSE
There are some instances where a coupon or price promotion makes strategic sense. Again, it all goes back to your business objectives.
Coupons are a good way for manufacturers to drive trial of a new product launch. According to a Valassis study (via BI Intelligence), 85% of consumers are influenced to try a new product due to a coupon. However, this should be a temporary promotion during the first 1-3 launch years. After that, these promotions should give way to a more sustainable approach. This also works for product reintroductions or reformulations.
Another scenario where coupons or price promotions make sense is when entering new markets/segments or when new distribution is secured. Coupons can help seed the consumer base and generate trial among new audiences (similar to sampling tactics). Just be sure that these promotions are only temporary, with funding eventually moved over to long-term equity building.
Retailers often appropriately utilize loss leader strategies to drive traffic, enticing consumers with a deal on a specific item. The expectation is that the shopper will also buy other more profitable items while in the store. This coupon strategy in particular warrants detailed modeling to be sure that there is ROI. It’s not easy to identify the right traffic-driving items and the complementary products that will generate the desired profits.
GIVE THEM A REAL REASON TO BUY YOUR BRAND
The more sustainable approach is to focus on long-term strategic growth drivers. However, these approaches require more patience on the part of the business to realize the effects. Long-term patience is something that is in short supply among corporations who feel they need to answer to Wall Street each quarter.
There are two investment levers you can pull. Both of them require investment in SG&A. You can build brand equity through commercial programs and/or product/service innovation. Either of these investment actions helps to build long-term equity and preference that reduces the need for price promotion. This will make your brand more valuable to both consumers and investors, and less susceptible to competitor promotions. You will find that over time your P&L will become healthier, with gross margin and EBITDA rising.
You should evaluate these options versus your current approach and decide if switching strategies makes sense for your brand. Keep in mind that a complementary mix is an option, provided you plan to utilize coupons for some of the more logical and practical reasons previously mentioned.
SOME BRANDS AREN’T QUITE READY TO GO COLD TURKEY
It’s understandable. You feel like you’ve got an uphill battle. Some things you don’t have complete control over. Like where the money goes or how it’s earmarked. If you are in a senior-level position, perhaps you are lucky enough to make these decisions and you can move the money around between budgets or lines of the P&L.
But for everyone else, you may have a coupon or price promotion budget you have to use. If that’s the case, you do have one other approach to make these promotions profitable. You can use the promotional or coupon investment to partner with retailers. This is a smarter coupon strategy.
A trade partnership is a great opportunity to put those promotion dollars to use, but also open up the opportunity to ask for something in return: more facings or greater distribution. Facings/distribution is the #1 driver of volume and share. So much so that increases in distribution are enough to offset even the most extreme temporary price reductions. This was proven time and time again in every single market share drivers analysis that I’ve ever conducted. If a trade promotion gets you more slots on shelf or into more stores, go for it.
WHAT’S NEXT? RUN THE NUMBERS AND MAKE A CHANGE
The best thing you can do next is to take a look at your own brand’s tactics and run the numbers. If you don’t have an ROI analysis, work with your Finance partners to build one. Find a way to get the data you need. There is no reason to run promotions like these without knowing if they pay for themselves and add to the bottom line.
Cut, change, or optimize your program depending what the numbers tell you. Your goal is to make money. Market share is not enough. It’s a means to the end: profit.
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Kevin Namaky is CEO at the Gurulocity Brand Management Institute, a marketing education company that trains and consults for notable brand teams including Kimberly-Clark, Scotts Miracle-Gro, Bolthouse Farms and Gorilla Brands. Kevin is a featured instructor for the American Marketing Association, lectures at the IU Kelley School of business, and has been featured in Ad Age, Forbes, Fast Company and the CMO Council. Previously Kevin worked for 20 years in the corporate and agency world growing notable brands. Follow Kevin on LinkedIn.