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Fall 2003 Why Coupons and Discounting Don’t Work

There I was in a small café, listening to a client, a specialty retailer. “What’s the big deal if I give a weekly promo price in my ads?” he said. “It will attract new customers and put money in my jeans I wouldn’t have had.” I asked, “Do you know how much profit you make on $1 of sales?” He said, “I don’t know—probably around 26 cents.” No. “The average American business makes 3 cents per dollar profit,” I said. “Think how much in sales you need to generate to make back that $10 discount.” His eyes widened, and we formed a plan to get out of the black hole of discounting.

Discounting is nothing new, but it is pervasive. The National Retail Federation recently reported that more than 75 percent of retail goods were sold at a discount—that’s up from 7 percent 20 years ago. At one time, a retailer held an occasional sale to boost sales by clearing out old merchandise. Today, it’s a given among customers that any item at full price today will be on sale next week—all they have to do is wait.

What’s wrong with it?

Some lower-end products and retailers benefit greatly by being perceived as “discount” or “off-price.” But you’re not Wal-Mart, and discounting can work against you. Why? Because when you say “specialty retailer,” the perception among consumers is that there’s something premium about your products. And if you’re a specialty retailer of upscale products, they’re right. But once those products are discounted, they lose cachet, your image is cheapened, your brand suffers, and so do your sales. In effect, your independent competitive edge is gone.

More than just slashing prices, discounting includes coupons and other offers that shrink your profits. Not only that, they don’t build your business: instead of customer loyalty, they promote a hit-and-run mentality. Retailers who say “We need to do something” to spark sales almost always take the easy way—they discount. It takes little imagination, and since everybody else does it, those retailers assume it works. But does it? Here are several key reasons discounting and coupons don’t work:

You attract unprofitable, occasional customers. Shoppers who found you through coupons will wait for the next one. They’re price conscious, not value-oriented. To keep attracting them, you have to keep advertising or sending coupons, or they won’t come back. Coupons soon become your whole marketing plan.

You devalue your merchandise. You’ve taught customers that your product isn’t worth what you originally priced it at. Rather than using coupons or advertising discounts, upscale retailers reward their customers with various perks (rewards programs, add-ons and the like)—not discounted prices. You can do the same thing.

You reward the wrong people. When you discount prices, you’re rewarding customers who have no relationship to the success of your business. Instead, they become addicted to looking for your “deal” and not your newest, featured or most profitable merchandise.

Coupons cost you. When you factor in your time in creating, printing and distributing coupons (ad rates or postage, for example), plus the actual discount itself, you have a very expensive promotion.

And here’s something else: Not only do discounts and coupons not build your business, they can erode your customer base. How? If there are inequities in the deal, customers will discover them and walk away. For example, you have an offer for first-time customers that gives them a discounted price. If your existing customers find out that first-timers are getting a better price than they are, those regulars will be unhappy—and they just might not return.

A better way

Look at what’s happened to the great department-store chains: They’re now mired in a discount nightmare. They can’t afford to hire and train a quality sales force. The customer’s shopping experience is often unpleasant. The merchandise is less interesting than ever. And the only thing that brings customers in is the discount. Department store names now mean nothing as a result.

It’s not just department stores, of course: any retailer of any size can get hooked on discounting. Once you do it, you’re often condemned to repeating it.

Inexperienced marketers make discounts and coupons their total advertising campaign. Then to prove it works, they point to all the redeemed coupons to justify the success of the campaign. But what it really proves is that there are bargain hunters out there. Just because they come to your cart or store this time doesn’t mean they will again—unless they have a coupon. And customers who come only if you give them coupons are not the loyal regular customers you can build a business on.

And you won’t have a business if your profits disappear. If you’re one of the retailers who rely solely on discounting to make sales, you need to stop, and rely on selling instead: Learn and use proven sales techniques to increase profits. Instead of giving away your profits to people who don’t know you, concentrate on these five ways of doing it better:

Start a mailing list. If you don’t already have one, start collecting customer names and addresses. If you do have one, use it to keep in contact with customers who consistently spend a significant amount of money with you, or who at least buy on a regular basis. And keep the list up to date.

Reward only the people who know you. If someone is on your mailing list, they get additional perks. Think of all the club cards at various grocery stores, the “11th Drink Free” cards at independent coffee houses, airline miles for frequent fliers and the like. All of those customers get a reward because they’ve chosen to funnel their money to one store or business. You should reward them, too.

Learn proven selling techniques. And train your sales staff, too. They need to understand the sales process, know your products, and believe in them. If they don’t, they’ll fold when a customer raises an objection or requests a discount, and lose the sale.

Use a training checklist. It will help you make sure you’re covering the features and benefits of your merchandise, especially the highest-priced goods.

Follow the leaders. Think of retailers you admire and aspire to be like them. For example, would Starbucks give you a discount just because you ask? Does Gap pepper the world with coupons? No. They don’t have to. Neither do you.

If you discount or coupon your image away, you’ll find yourself trapped into giving away profits, too, putting you at the bottom of the retail “food chain.” You can reach your full profit potential—and stay there—only when your customers believe you’re worth full price.

To discount or not to discount? The choice is yours. But do the math and see if in the long run, discounting does what you want it to and puts your business where you want it to be: On top.

Bob Phibbs

Bob Phibbs, the Retail Doctor , has helped hundreds of small and medium-sized businesses in every major industry, including hospitality, manufacturing, service, restaurant and retail. He and his work have been featured in Entrepreneur magazine, the Wall Street Journal and the New York Times. In addition, Phibbs provides business makeovers for the Los Angeles Times.Phibbs owns a publishing firm and has started two successful businesses. In addition, his years as a conductor have helped give him insight into building teams.

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