Coupons, as a promotional strategy, have been around for over a hundred years. But they will continue to flourish only if the coupon sites don’t mess them up. Or if the fundamental premise of coupons itself, changes. Rather than serve as promotions to capture an economic segment, coupons become the incentive to promote new consumer behaviour – like brand referrals.Coupons tap into the economic theory of price discrimination. Manufacturers would ideally like to sell to different buyers at different prices, based on their underlying willingness to pay (what economists call price elasticity). For example, they would like to get all the 2,500 consumers who will pay $2.50 for a product, but also get the 1,000 who are willing to pay just $2. A coupon is a way to make this happen. A coupon clipper is the consumer willing to take that extra effort (at some personal cost), like rummaging through a newspaper and clipping coupons, to get the lower price. Others continue to buy at full price.
Coupon sites seem to miss this point. They make it nearly costless to find and redeem coupons. Daily deals proliferate on any number of sites. Phone apps can search and stack your coupons. So almost anyone, and everyone, can get the deal.
The plot has been lost. This is no longer a price discrimination strategy for the manufacturer. Not anymore is it a clever application of microeconomic theory that transfers consumer surplus to the producer. It is a sale! Almost any customer can get this price painlessly. To top it off, the customer doesn’t even have to be loyal. He can switch products at negligible cost. Discounts wind up being huge and the coupon sites slurp off a big chunk of what’s left. It even creates perverse incentives for merchants and coupon site salesmen to artificially inflate the regular price and make deals look better than cotton candy.
For a brand, this strategy is simple, neat, and wrong. So why are manufacturers still in the game? There are signs of retrenchment already. Some brands are balking and some deal sites are morphing.
Is there a better play? Indeed, there is. A better strategy for manufacturers would be to focus on a loftier objective – customer acquisition – and use a variety of incentives, coupons among them, to coax happy customers to refer others.
More than 75% of consumers say they seek advice before making purchase decisions. They ask the people they trust. Remodeling your house? Chances are you sought a referral from a friend. Breakfast ideas for your school kids? You probably asked another parent, or a relative with kids. Our new world of social networks makes it enormously simple to just ask. It also makes impactful referrals from like-minded people just a click away. Purchase decisions will be made only this way. Merchants and brands must capture this opportunity and build it into their promotional strategies and reward programs.
Get your customers to refer your products. Reward them for it. Hand out those coupons, but get something back. Amplify your reach through their networks. The customer gets a deal – you get new business. Now that’s good Couponomics.
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