When Does a Visitor Need a Coupon?
Newsletter # 113: 11/2010
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection
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Seems like Groupon is all over the news lately, as are different
opinions about the effectiveness of Groupon. Did you know
there's an academic study available on this topic? Very
interesting reading, check it out here,
see link under the picture and educational background, "Groupon
And the fact is, we often see this kind of thing in database
marketing. The higher the discount, the lower the quality of the
customer attracted, and then the subsidy costs kick in with current
customers, making the financial outcome even worse.
Subsidy costs, Jim? What are subsidy costs, and why should I
care about them? This and more about the financial impact of
giving the wrong coupons to the wrong people for the wrong products in
this issue of the Drilling Down newsletter.
Let's do said Drilling.
Questions from Fellow Drillers
When Does a Visitor Need a Coupon?
Q: First off, I very much appreciate you sharing all this wonderful content
on your blog and conferences such as eMetrics.
A: Thanks for that!
Q: My question is a simple one, but I think the answer may be hard:
When does a visitor "need" a coupon? *Need* would be defined as: the
visitor would not have placed an order unless presented with the coupon.
A: Hmmm...methinks we're going to have to define a few
concepts and be clear on the goals to make sure we are nailing this
down... visitor versus customer, sales versus profit, etc. In other words, answer is not hard, but
could be complex without defining context.
Q: It's still a mystery to me why so many retailers seem more than willing to
hand over all their margins to Groupon or give coupons to all
visitors. I am curious whether you would approach this question using
observational data (eg web analytics) or experiments (eg AB testing), or
A: Right - is a mystery to me too!
There are certain situations where this approach might be appropriate, but the
problem with much web "marketing" (which often is really just
advertising without much thought about marketing) is often there is success in a narrow or special situation.
Then the pundits jump on and say "if you're not doing this you are stupid", regardless of the business
situation and / or without recognizing the special circumstances that are
driving success. That's Marketing; understanding why it works,
under what circumstances, for which segments, involving which
So, for example, if I was launching a brand new service business (restaurant) or a new product that is complex and won't sell without trial
(like yogurt that "naturally regulates your digestive system"), Groupon might be
a slam dunk for a product launch. No surprise here; coupons are
often used to drive trial in product launches because the need is to
reduce price resistance and drive sampling.
On the other hand, if my product or company is well known and I have tons of
loyal customers, Groupon could generally be a financial disaster if you
care about profits. But if all you care about is response to the coupon, it
could be a great success! Because tons of people who would have
bought at full price anyway get a huge discount and you get to sell
the product below cost. Awesome!
What do I mean by this, how can you have high response and low or
Here is what I have seen over the years: whenever response rates
are abnormally high, it means you have a high percentage of responders
who would have bought anyway without the coupon. This is seen
over and over in database marketing, online and offline. From a
financial perspective, it means you have probably given up the coupon
value with no benefit, a so called "subsidy cost".
How do you prove this is happening in a promotion? If you
want to really look into and prove these effects, first examine the
percentage of response that is from current customers. If it's
high, that's the first clue the discount is cannibalistic, not
If you want to quantify this subsidy cost a bit more is a
relatively simple way, take the customer redeemers as a group and look
at their average sales for a few months prior to the coupon promotion,
during the promotion, and a few months after the promotion.
Often what you will see is their spending behavior changed very
little during the promotion.
For example, let's say the coupon is 50% off. The monthly net
spending sequence over time might look similar to this:
2 months prior: $100
1 month prior: $100
Promotion month: $50
1 month after: $100
2 months after: $100
This shows the customers redeeming the 50% off coupon did not
change their behavior at all; they simply took the discount and bought
what they would have bought anyway. Meaning, the coupon cost is a
real cost to the bottom line with no offsetting incremental profit.
Bottom line, for every response you lost $50 in sales plus the cost
of the campaign, even though you had tons of responses and sales from
those responses. If it was a large campaign, your overall sales
for the month net of discounts probably dropped.
Financially, if your cost of goods is 50%, you gave up $25 in profit
for every response, minus the per response cost of the campaign.
And, the above behavior is most likely to occur with best, most
active customers! Across all redeemers, you might get $60 or so
instead of $50 during the promotion month, but you are still losing
money on every redemption - the higher the response, the more money is
This is one big difference between Advertising and Marketing.
Marketing goes beyond Advertising, wants to understand the relationship of specific products to
segments of customers, how pricing and modes of distribution affect this
relationship, and the profitability of the relationship.
So, with that backdrop, let's try the question:
Q: When does a visitor "need" a coupon?
A: If I take your question literally, there is a concept in Marketing called coupon proneness, and it's the
classic definition of "needs a coupon". Essentially, it means the more coupons you give people the less likely they are to buy without one. If you
can imagine what this looks like over time, it's margin erosion hell.
It's taking the example above, where no incremental profits were
generated, and ensuring it will happen time and time again.
From a Brand perspective, always offering coupons means you are teaching people your prices are too high, or
there is a tangible reason your company has to "beg" for sales (implies poor service or quality).
Either way, the outcome is not so good for Brand trust and any
evangelism that might result.
The exception to the above is among the "never pay full price" segment, who don't buy anything
without a discount / coupon. From this segment, you get the benefit (?) of
your coupon offers being spread all over the web, attracting many other
"never pay full price" customers who generally have negative net
values to the company. Great, huh?
The end result of this pattern is horrible customer loyalty, margin
erosion among current customers, and lots of new customers that are 1x
buyers. This means you have to spend *even more* on Advertising to constantly
chase new 1x customers, while at the same time your margins in the
current customer base are being consistently eroded.
Certainly not an optimized system!
Some people will argue the "extra sales" they get are worth the price of
encouraging the above behavior. But there are not too many businesses that
put sales in the bank, what they put in the bank are profits. So this is
very short-term thinking and in fact, you find a lot of businesses
that follow this model perform very poorly financially.
So, you ask, when would a visitor "not have placed an order unless presented with the coupon"? The answer is this: when you have "presented" a coupon before, and the more often you have done this, the less likely they are to buy *until* you
Sure, you could use A/B testing, but it's not hard to guess what you will
find - when you present a coupon, more people buy. Duh, that's
Advertising, right? But that's optimizing for conversion, not for profits, and conversion can't be
deposited in the bank any more than Sales can be.
You have to go
For example, if you had the capability to recognize purchase or visit patterns
among visitors, you could segment by these behaviors and present coupons on
the site only when they were likely to have an incremental rather than
cannibalistic outcome. For example:
1. A new visitor who becomes a repeat visitor X times but does not buy
2. A current customer who has not purchased in over X weeks
and so forth. You could test for "X" and optimize for highest profitability
if you also ran a "null" control group - where if A = coupon, B
= no coupon. Then look for incremental sales behavior or "lift" from those
offered the coupon versus those not offered a coupon, and run out the
profit and loss.
Of course there are other scenarios, mainly current customer comes to your site
because you sent them a coupon, as opposed to presented
one on the site. Not sure if you
were including that in your question, but I took your meaning literally.
The scenario with subsidy costs when sending customers a coupon is
basically the same as the example above, except you control which
customers get what coupon values or if they get a coupon at all.
More info on executing and measuring in that scenario for customers here,
and for an example of a company putting this approach into practice,
Have a question on Customer Valuation, Retention, Loyalty, or Defection?
Go ahead and send it to me here.
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Customer Marketing program designs? Click
That's it for this month's edition of the Drilling Down newsletter.
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'Til next time, keep Drilling Down!
- Jim Novo
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