How to Create a Profitable Coupon Offer

Local business is loco for deep discount coupons, thanks to Groupon, LivingSocial, Yipit, EverSave, BuyWithMe and hundreds more copy-cat coupon-selling websites.  Unfortunately, many biz owners get burned by making ill-conceived offers, targeting the wrong customers – or both.  As coupon sites soar and millions of local businesses join in, crafting an offer that actually makes your business more money in the long run is critical to success.

In attempting to board the Groupon gravy train, some local businesses forget the key question:  Will my offer make money or otherwise benefit my business?  In fact, about one in three business owners who’ve offered Groupons say they lost money, and 40 percent won’t do it again.

The problem, however, can often be fixed.  Your goal is to attract new customers who are likely to buy again at full price.  When discount offers simply provide a way for existing customers to pay less, the result is reduced profits for your business – both now, and in the future as customers grow accustomed to discounts.  In most cases, coupon offers end up doing a little of both.  Your task is to shape the offer to maximize profits.

It helps to understand the two basic ways that a coupon offer can benefit a local business.   First, it’s a way to lure the most price-sensitive customers by making different offers to different groups of people on the price-sensitivity scale.  Academics know this concept as “price elasticity” – basically how much consumer demand for a product or service changes in response to a change in price.  The idea is to peg the offering price to the profit-maximizing point on the demand curve.

In order for your deal to succeed, the people you offer it to must be more price-sensitive than either your existing customers, or your target market in general.  These are customers who generally place a lower value on your product or service than regular customers do.

But attracting new customers isn’t the only benefit of offering coupons.  Placing your offer on a high-profile site also has promotional perks.  Even if people don’t jump in now, they are learning that your business exists and has something they want in the future.  The impact is most pronounced if your business is new, hasn’t done much advertising before, or generally has a low local profile.

Here are eight profit-boosting tips for crafting an online coupon offer:

1.    Know your marginal cost: Deep discount offers work best for businesses with low marginal costs, where the price of producing an additional “unit” to sell, over and above fixed costs is low.

2.    Be patient: Discount offers can hurt short-term profits but pay off later as new customers return and pay full price.

3.    Block multiple purchases: Research shows that profitability drops greatly when customers are allowed to purchase multiple coupons.  Disallow multiple purchases if possible (although there’s nothing to stop buyers from setting up multiple accounts to buy your coupons).

4.    Gather purchase data: If possible, find out if customers who bought your discount coupons have purchased from you before at full price. You might start by simply asking them.  Remember that coupons can re-active old customers who’ve forgotten about you or moved to a competitor

5.    Consider fees: Stiff pay-to-play fees charged by Groupon and others also curb coupon profitability.  Groupon, for example, takes up to half of the coupon price, although the fee drops to 10 percent if your offer only appears following user searches and not in Groupon’s daily email.

6.    Query customers: Capture as much information about coupon customers as possible, including names and email addresses, and follow up with further offers.

7.    Cross-sell and up-sell: Coupon customers might buy other full-price items as well. To facilitate this, be sure to specifically offer them related items.

8.    Analyze results: To see how your offer is performing, take advantage of the measuring and tracking services offered by Groupon and others.

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About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.

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