OK…I have been known to pick up those “Dummies” books. I would go so far as to say I occasionally qualify myself as a dummy. So who better to write about a subject for dummies..than a dummy.
Promotions are back you know? The contest, the coupon, the free sample. Look at the success of a company like Groupon. They are selling millions in pre-paid coupons to folks who just have to have the darn things. There is discounting involved, and the merchant has to share the take with Groupon, so numerous businesses are shying away and crying foul…that the discounts will hurt, not help, their businesses.
I am sorry…am I missing something? When you pay for an advertisement that offers a customer 10% off of something in your store. That ad costs you say, $1,200 to run for a week, (for the sake of argument.) Your product cost $400 retail
Then…your ad works. WOW! Two people come in and buy your widget. Great!
You made $800 minus the 10% discount, so you got to keep $720 of your sales. Your product costs you $200, so now you are down to $320 in your pocket, and then you pay for the ad…or $1,200. So technically you lost $880 in the process of getting two customers.
Wouldn’t you rather work with a coupon company that discounts your offering 50% and splits that with you, essentially giving you 25% of your total potential sales value?
You don’t sell anything, and you don’t pay.
Let’s say you the coupon goes out to 25,000 emails. You end up selling 100 units at $400 retail or $200 with the 50% discount…and that is $20,000. Split that with the coupon company, and your take is $10,000, and 100 people are now toting around your product to show all of their friends.
Now…I know I am a dummy, but what part of that doesn’t make sense?!? I suppose IF your cost is $200 per unit, then it makes no sense. But let’s think about that…and I do apologize for all of the math.
If your cost is $200 per unit, and you only take in $100 per unit, aren’t you losing your proverbial butt on this? Are you?
If you sell 100 units and it is costing you $100 per unit to sell through a coupon system…then you spent $10,000 to sell these products…or “Market” them, as it were. That is $100 per unit marketing expense. But what are these customers worth in the long term? “Customer Lifetime Value” should always be considered, and “customer acquisition” is always the most expensive component, with regard to marketing, of a long term relationship with a customer.
In the first example you sold two units for $720, got to keep $320, you spent $1,200 on advertising, and thus lost $880. That is $440 per unit marketing expense.
You can chalk BOTH of these up to non-effective marketing tactics, or you can see the coupon offering as a way to build brand and market share.
What happens when 25 friends of those 100 sales come in an pay full price. $10,000 gross sales and $5,000 net is what happens.
How about 100 of the 25,000 people who got the Groupon email come and see you at some later date and pay full price, because now they know your company is there?
I can’t think of anything better to say here than, “Ya feel me?”