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You should stop issuing coupons. Here's why.

September 28, 2011 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

Megan McArdle, in her May 11, 2011 article, "Discriminatory Pricing," in The Atlantic, suggests that coupons are simply a way to distinguish between markets that exist for your offerings.

She says "...mostly what coupons allow you [the seller] to do is sell a product at a high price point to people who are brand loyal and can't be bothered to clip coupons, while selling at a lower price point to people who care more about price, and place a lower value on their own time." She does acknowledge that the latter buyers aren't very loyal.

I must say that I've never viewed coupons in this light. Indeed, those of you who are regular readers know that I generally rail against any form of discounting because it cheapens the brand. Is Ms. McArdle's premise valid? Let's explore it together.

Brand Loyal Customers

Actually Ms. McArdle placed two conditions on these buyers:

• That they are brand loyal.
• They can't be bothered clipping coupons.

Certainly buyers with high discretionary income aren't likely to clip coupons. As Ms. McArdle points out, it's an extremely poor use of their time. I agree that these buyers are not going to be affected by the existence of coupons. As long as the brand promise is fulfilled they'll continue to use the product/service and pay your higher price to get it. Having said that, I can't help wonder what percentage of "brand loyal customers" this represents.

Available Data

To answer this question we need a frame of reference. To help us in this analysis I've chosen three resources - Value Line, the Statistical Abstract of the United States:2011 and a March 11, 2011 Reuters U.S. article referencing a Valassis research study on coupon usage.

While researching Walmart for some earlier blog posts, I went to Value Line and discovered that Walmart defines their target customer as households with income of less than $70,000. Frankly, I was a little surprised to find the number that high; however, I have no evidence that contradicts Value Line's report so we'll go with that number.

Given the definition of Walmart's ideal customer, is it reasonable to assume that households with less than $100,000 of income are likely to clip coupons? Let's make that assumption.

I realize that I am generalizing buyer behavior. Obviously there are buyers with low household incomes that won't clip coupons and some beyond the $100,000 range that might. Bear with me, though. I believe that even though we have limited data and, of necessity, are making some assumptions, the point I'm about to make will prove valid.

Using our assumption that households with income less than $100,000 clip coupons, we turn to the 2011 U.S. Statistical Abstract. The 2011 Abstract's most recent data, 2008, shows that only 12.5 percent of the households have incomes of $100,000 or more. Based on our assumption, that means that 87.5 percent of households are likely to be clipping coupons.

Even if we drop to the next income level reported in the Abstract, $75,000, we're left with 77.7 percent of the population using coupons. Which coincides with the Valassis research in which 76 percent of consumers reported using coupons 'regularly.'

Conclusion

What does all this mean? To me it means that somewhere in the vicinity of 76 percent of brand loyal buyers are going to take advantage of coupons. These are people who would have bought your brand anyway, but are happier doing so for a lower price as long as it only takes a few seconds to achieve that savings.

Even if the coupon usage is only 50 percent, do you honestly believe you're going to gain enough price buyers to offset the discounts you're giving to your brand loyal customers vis-a-vis coupons? That's not been my experience.

When buyers find a product/service that satisfies their needs, they tend to stick with it even though there are lower-priced alternatives available. Stop bleeding revenues and profits while diminishing the value of your offering; stop using coupons!

About Dale Furtwengler

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