Merchants are always searching for new ways to increase revenue, to overcome that final hurdle in getting customers to pay. Not surprisingly, sometimes people won’t pay for something because the price is just too high for their taste or budget.
One way to overcome the pricing hurdle is to offer varying prices to different customers for the exact same product. Offer a low price to the cheapskates, and a normal price to people with unlimited budgets. This might sound discriminatory, but there are ways of doing this that keep everyone happy.
Coupons mean different things to different people, but for anyone who sells a product, coupons are a way of segmenting pricing based on willingness to pay. Some people will spend hours clipping, collecting, and collating coupons from newspapers to save 10% on Tylenol or 5% on Cheerios. Others simply don’t care enough about price to spend the time doing this – and will happily go on paying full price. Sometimes General Mills (producers of Cheerios) might be giving discounts away to customers who would have paid in full, but the ubiquity of offline coupons suggests that any cannibalization is more than made up for with increased sales. Is that really true and what does it mean to online merchants?
In a previous life, I ran a company that created and promoted a popular product called SureType. SureType was a “macro” tool for Mac and Windows that allowed users to automate common tasks. (Today, the SureType trademark is owned by Research in Motion, the creators of the Blackberry device). SureType was my main laboratory for using coupons online, and we were able to increase our sales by over 10% just by using coupons. Here’s how:
What kind of coupons work best?
Any coupon has a chance of being effective, but different customers have different price sensitivities. To maximize revenue, we found it best to offer progressively larger coupons as more time elapsed (see Figure 1), a tool that Cheerios and Tylenol don’t really have at their disposal since they plaster coupons in newspapers as opposed to using 1-1 targeting. We started with a low coupon of 20% off full price. People who didn’t take advantage of that coupon then got a 30% discount offer, then a 50% discount offer, and then a 75% offer. How did we target these coupons? More on that in a little bit.
What did the distribution of coupon redemptions look like? More than 40% of coupon-accepting customers chose a 20% discount coupon, as shown in the graph below. More than half still weren’t willing to make a purchase until they were offered a lower price (or rather, a higher coupon).
At the end of the day, our coupon strategy increased our total sales by more than 10%. Had we just gone with one coupon (say, the 20% off coupon), that number would have been much smaller. Each successive, increasing discount eeked out a small number of stragglers who finally decided the price was right. Given our margins on the product, 75% was our breaking point. Software and digital content publishers generally have more flexibility in offering such massive discounts, but retailers can still offer a sliding scale.
Effective Coupon Disbursement
One reason why offline coupons seem to work is because there is so much effort involved in redeeming them. This is a natural segmentation process. If time is money, then those with more money won’t spend the time clipping coupons, and will instead pay full price. Those on more of a budget need the coupons to actually justify the purchase.
In the online world, e-mail campaigns can be an effective way of disbursing coupons to the right group of people – those who signed up, created an account, joined a mailing list, etc but just did not pay. With e-mail campaigns, you can offer coupons only to customers who have not already purchased your product. For example, users who have already purchased your product would not receive a coupon, whereas non-paying users would first receive a 20% off coupon. Those who redeem the 20% off coupon would not receive a subsequent coupon, which might offer the same product for 30% off. However, in order for this to be effective, you must suppress previous purchasers from your e-mail list. There are plenty of products and services which fluctuate in price depending on when somebody buys; an airline full of people might have dozens of different prices, with purchase time as the differentiating factor.
Effective Coupon E-Mailing
Coupons can be sent to customers who download your free or trial products (for software), sign up for a mailing list (anything!), enlist in a free trial (for an online service/publication), or attempt to make a purchase on your site. The problem is how you actually get a customer’s e-mail address so you can e-mail her if she doesn’t purchase. Here are a few ideas that you’ll find throughout the web:
- Require shoppers to set up a user account in order to purchase products on your site. Some people will get through step one (creating a user account) without buying anything – and are thus ripe for receiving coupons. (Only if they opt in, of course)
- Offer users with expiring trials the chance to extend their trial by entering their e-mail address. Once they do this, they get a code to extend the trial. This is particularly effective as it forces a consumer to enter his real e-mail address in order to continue. Again, a great way to build an e-mail list, and since the person hasn’t purchased during the trial, an ideal target for a discount coupon.
- Offer a “special deals” mailing list directly on your site. Just like people who clip newspaper coupons, there are some people who can’t resist things like this and will sign up.
- Require e-mail addresses to download free trials or “light” versions of software. You can even send the download link to the e-mail address that the user enters in order to ensure that it is valid.
Won’t I lose potential customers by asking for their e-mail address?
Without a doubt. However, it is often more profitable in the long run to lose some initial customers in order to gain contact information. It’s not too hard to calculate revenue earned when requesting e-mail addresses vs. requesting no information and sending no coupons.
If Y is the number of potential customers, D is the number of departing customers (who do not want to submit their e-mail address), X is your conversion rate and Z is your coupon conversion rate, then we can determine which model will create more revenue.
For example, consider this scenario:
If 1,500,000 people reach the landing page, 1,000,000 customers (2/3) download and there is a 1% conversion, you will make 10,000 sales.
If you require a registration:
Suppose 1,500,000 people reach the landing page and you require a registration, which causes a drop-off of 50,000 people. If 950,000 people download and there is a 1% conversion, you will make 9,500 sales.
However, coupons boost this such that 0.1% of the 950,000 – 9,500 pay after receiving a coupon (950,000 = original total, 9,500 = people who just paid, so they won’t get a coupon).
Thus, 0.1% * 940,500 = 940 sales.
So now you have 9,500 sales + 940 sales = 10,440 sales > 10,000 sales.
Your mileage may vary, but incorporating coupons into any online sales process can be a very effective way to boost revenue and better appeal to a wider swath of customers.