Drive Consumers with Online Coupons

The founder and CEO of ZiXXo shares marketing tactics on how to tap into consumers' purchasing behavior with online coupons.
In the early days of ZiXXo, we used to walk the streets selling online coupons, to get a taste of the issues we were facing. Businesses loved the idea of online coupons for a variety of reasons. But then we would ask them what offer they would use. At that point, they would look like a deer in the headlights, and eventually say "Uh…10 Percent Off?"
The problem is that a 10 percent discount may result in a temporary increase in business, but at the expense of profits. Let me demonstrate with an example where the average transaction value is $100:
Full price scenario:
• Gross margin: 50 percent
• Transaction: $100
• Gross profit: $50
10 percent discount scenario:
• Gross margin: 50 percent
• Transaction: $125
• Gross profit (before discount): $62.50
• Discount (10 percent): $12.50
• Gross profit (after discount): $50
So, in order to earn the same profit, the coupon would have to grow your business by 25 percent. Of course, you may win valuable long-term business, but then these sorts of price-sensitive consumers are likely to jump to a competitor if you don't continue to discount.
Now consider a coupon offer that drives favorable consumer behavior. In this case let's encourage consumers to earn a discount by purchasing more. The actual offer is "$20 Off Purchases of $200 or More.."
Discount scenario:
• Gross margin: 50 percent
• New average transaction: $200
• Gross profit (before discount): $100
• Discount: $20
• Gross profit (after discount): $80
Using this coupon offer you reward only those consumers who are willing to spend $200 in order to earn their savings. Instead of making $50 on a $100 transaction, you are making $80 on a $200 transaction. You'll also note that we didn't use a 10 percent discount, but instead defined a specific dollar value for the discount. In the user's mind they are getting a 10 percent discount, but almost all consumers will actually spend more than $200, while the discount remains fixed at $20.
Offering consumers a deal to encourage increased spending is nothing new. In the online world, Amazon realized that their average transaction was $8. So they offered free shipping for orders of $25 or more. I always buy more than $25 worth of books, because I hate to pay for shipping.
In the offline world, an example is the fast food "Meal Deal." By combining the sandwich, fries and soft drink the consumer gets a discount. Then the restaurant offers to supersize that meal for "just a little more," further increasing the average transaction value. Of course, the portions that are increased are the fries and soft drink, which have the largest profit margin.
You'll also note that in this example, consumers who continue to spend less than $200 gain no benefit. This results in a segmentation of the consumers into those who are willing to spend more to get a discount, and those who aren't. Customer segmentation is an important aspect of most successful coupon offers.
Just how effective are coupons? Well last year some of the largest and most successful companies in the world (e.g. P&G, McDonalds, et cetera) offered a total of 323 BILLION coupons in the United States alone. Also consider that over 50 percent of the Sunday newspapers are purchased for the coupons, and 79 percent of all U.S. residents use coupons. People love coupons.
In order to tap into this demand for coupons you need to determine what consumer behavior you want to reward, and then figure out a suitable reward. Here are a few generic examples that achieve various business objectives:
Trying to gain new customers?
• 15 Percent Off of Your First Order
• Sign-up Now and Get 3 Months Free
• Free Introductory Lesson
Want to reward repeat business?
• Your 5th Sandwich is Free
• Your Second Session is ½ Price
• Every 5th Order is 50 Percent Off
Looking to introduce new products or sell excess inventory?
• 15 Percent Off All Dive Computers
• 10 Percent Off Our Gold Package
• 2005 Snowboards 70 Percent Off (while they last)
Need to grow business during slow times?
• 33 Percent Off Midweek Rentals
• $.50 Off Any Coffee Drink Weekdays 10AM - 3PM
• $3 Off Haircuts Weekdays 10AM - 3PM
• Early Bird Special 15 Percent Off All Entrees Before 5PM
Other business objectives include:
• Capitalizing on seasonal or special events
• Increasing your average transaction size
• Generating customer referrals
Most marketing people believe that coupons simply grow revenue at the expense of profits; in other words, buying your customers. However, the true power of coupons is the ability to drive favorable consumer behavior. The trick is to determine what favorable behavior you wish to encourage and then define a coupon offer that rewards that behavior.
Mike Hogan is the founder and CEO of ZiXXo a web 2.0 service for creating, managing and syndicating online coupons, using a pay-for-performance business model. In addition to providing sample coupon offers, ZiXXo's 1-Click Coupons auto-generates custom coupons for individual businesses, with offers specific to the merchant's business category…10 Percent Off is NOT one of these offers.

By Mike Hogan