Thursday, May 31, 2012

Promotions Aren't Free - But They Shouldn't Cost You Revenue You Already Had

The core function of a promotion is NOT to cost the company revenue. They are meant to generate sales.

This seems obvious, but here is an example of how a business did not follow this basic tenant of the marketplace. I just got a coupon from Safeway  for $10 off my next purchase (thank you). They did a good job limiting the date. The next purchase I made within the approved time frame was for $6.45. I only needed a roll of tape.

Being a logical business owner, you say "then you don't get to use the coupon." I would say that too, but

the cashier said "if you get a magazine, you should be over that $10 limit." Again, thank you.
As a consumer, I am all about getting my $10. As a marketer, I felt like I should explain to this very helpful lady that you don't give away promotional things to the customers you already have. I was faced with a moral and marketing dilemma. Consumer Lisa won out. I plunked down my $0.42 and walked out with not one but TWO free things.

Perhaps having such a generous discount (100% off--wow!) makes me feel good about my grocery store. There's value in that when competing for a sale. You wouldn't know this, but I live in a town with one grocery store. It is not vital for them to compete on that level because where else am I going to go?

The core point in my buying behavior -- my "sales conversion cycle" if you must get wonky -- is that I would have bought my tape with or without the discount. We shouldn't give away what the customer is already willing to buy when running a promotion. Consider your cold, hard sales goals no matter how exciting the balloons or bells and whistles are.

Groupon for example, is a bunch of fun and it proves its business model every time my best friend sends me a message imploring me to buy a golfing weekend hotel package because it is "such a good deal". Let's set aside the fact that I don't golf for a moment. And focus on what that poor hotel has been forced to endure:
  • At the typical 45% Groupon discount, assuming a 30% mark-up, the vendor is eating 25% of their cost for the pleasure of having these new customers.
  • The volume with Groupon and other couponing systems like this is overwhelming to all but the biggest retailers or service providers. So these people crush into a store or hotel all at once, take all the inventory at a ridiculous discount, take the sales people's time, and potentially push out the opportunity for regular clients to pay full price.
  • They have exposure to new people, yes. But these new people have been conditioned to expect outrageous discounts. They are not motivated to build a relationship.
  • The opportunity to show off their shop or hotel to a new audience is nice and worth spending some promotional energy on.
Multiply that 25% loss times 1000 new "customers" and you've got a company who lost money to promote what he could have otherwise sold. Worse, the vendor doesn't really stand a chance to convert this new crowd of coupon-wielding discount fanatics back up to full price. We know the human mind will begrudge any increase in price, no matter how illogical the discount was.

Business owners, don't add on to your promotions or be seduced by Groupon math unless you've thought through the real cost of that transaction - make the promotion actually promote your business. You still have to run a business after this promotion runs out so don't give away what somebody is prepared to buy, and don't reduce the value of your product in the eyes of potential customers.