discountUnfortunately, many business owners trip themselves up by making ill-conceived offers, targeting the wrong customers – or both. If you plan to grow your business by using coupons and discounts, crafting offers that are profitable for your business in the long run is critical to success.

When devising discounts, some businesses forget the key question: Will the offer make money or otherwise benefit my business?  In fact, most business owners who offer coupons either lose money or simply don’t know the financial outcome because they don’t track the data.   

The problem, however, can usually be fixed if you pay close attention to how you craft and promote your discount offers. 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 long-term profits.

It helps to understand the two basic ways that a coupon offer can benefit your 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 coupon site such as Groupon, LivingSocial or Yipit also has promotional perks.  Even if people don’t jump in now, they are learning that your business exists and has something they might 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 creating a coupon offer – either on your own or through one of the online coupon services:

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 receive or are allowed to purchase (on Groupon, for example) 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 used your discount coupons have purchased from you before at full price. You might start by simply asking them. Remember that coupons can re-activate 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 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 and marketing messages.

7. Cross-sell and up-sell:  Coupon customers might buy other full-price items as well. In fact, this is one of the big benefits of offering coupons – to entice buyers to see what else you have to offer. 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, LivingSocial and others. Keep tabs on revenue earned, customer demographics and more.  

 

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