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To Coupon or Not to Coupon…

To Coupon or Not to Coupon…

Groupon, Google Offers, Living Social, My Daily Deals, Moolala and a host of other social discount sites are taking the web and lives by storm. As a consumer, I love get 50% off my deals, hate the constant emails and really hate when I can’t redeem a coupon. However, as a marketer and a ROI champion – I have to dig in and evaluate each couponing scenario separately for every client and offer.

The question on if a client should do a Groupon or a Google Offer (or any of the others) is not easily answered without first doing some quick math. Take for example a restaurant that wants to offer a $50 dinner for 2 for $25.

Offer: 50% off Dinner for 2 ($50 value)
Scenario 1 – 50/50 Split

  • Client: Revenue per coupon= $12.50  (the other $12.50 goes to the coupon provider)
  • Assuming 10,000 coupons, that’s $125,000 and if the cost per sale is $25 – they lose $125,000 just on cost of supplies/dinners alone.
    • This scenario assumes a 50% margin on the sale

Scenario 2 – 40/60 Split

  • Client: Revenue per coupon= $15.00
  • Assuming 10,000 coupons, that’s $150,000 and if the cost per sale is $25 – they lose $100,000 just on cost of supplies/dinners alone.

Scenario 3 – 30/70 Split

  • Client: Revenue per coupon= $17.50
  • Assuming 10,000 coupons, that’s $175,000 and if the cost per sale is $25 – they lose $75,000 just on cost of supplies/dinners alone.

With pure numbers – the offer doesn’t look great. Most restaurants are hoping to get the consumer to repeat their visit or up-sell with additional meals/drinks. And there is additional value to having a packed house (unless the staff is so over worked that complaints/service issues ensue). Bottom line – using this coupon method – you have to be sure that your revenue per sale is greater then a 75% margin. Why 75%? – well, first off – to get into one of these you have to offer 50% off your product. Then – the coupon providers may take up to 50% of the coupon sale as a percentage. Leaving you with 25% of the original value.

The longer formula for getting to this conclusion is as follows (and this can be used for online coupons through CouponsInc as well):

Net Coupon Profit/Cost=((((coupon value*(# of prints * redemption rate))*margin)-((hard costs+((# of prints * cost per print)*print rate))+((# of prints * redemption rate) * redemption costs))

Definitions:

  • Prints = Actual number of coupons issued from offer
  • Cost Per Print = any print fees (typical with online coupons)
  • Print rate = % of coupons expected to be printed/issued
  • Redemption cost = Your cost per sale
  • Redemption Rate = % of coupons redeemed or expected to be redeemed
  • Coupon Value = Your share of the coupon sale

Other items to consider:

66% of Groupon deals are profitable for the seller, and 40% of businesses would not use Groupon again, according to a Rice University study. Restaurants tend to do the worst and spas tend to do the best.

Note also that the Groupon Promise lets any consumer get a refund, no questions asked. Source: Groupon Blog

And to dispel the other number pulled out of thin air, Groupon’s self-reported rate of repeat business after the voucher is 22%. Source: WSJ

Coupons are great – but they need to be great for your business – otherwise they can turn out to be nothing but a headache and you will become one of the 40% of businesses that don’t use coupons/social offers again.


Nick Lindauer
Nick is the vice president, client services and operations at Forthea. He’s been working in internet marketing since 2002, when – ironically – he answered an ad in the newspaper. When he’s not at work, he’s off spending time with his family, working on his house, building furniture, cooking on his two Big Green Eggs & brewing hot sauce.

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