“Everyone appreciates getting a little something extra from the companies they do business with.” – Scott Deaver

As I can tell you from experience, the cost of buying a horse is a fraction of the total cost of owning one. And so it came as a relief when I discovered Horse.com, “the source of everything equine.” Their prices are highly competitive and they offer discount coupons and money-saving offers if you simply sign up for their e-mail newsletter.

In the last month, I’ve received three separate 10-percent-off coupons from them. On the surface, this seems beneficial to all concerned.

The benefit to me is that I save 10 percent on supplies, which, combined with their normal low pricing, means I’ve saved up to 50 percent off the recommended selling price of quite a few products. For example, we just built an electric paddock fence for our livestock for about half the price I’d estimated.

The benefit to Horse.com is that they have a satisfied customer (me) who will buy from them again.

They clearly know that sending out money-off coupons stimulates sales. However, not everyone should be happy with this deal.

First, I now suspect that the company sends out coupons indiscriminately. I received money-off coupons from them both before and after becoming a customer. Just by signing up for their newsletter and waiting, I’ll probably receive another coupon or two. But I’ve already proven I’ll buy from them – and they must know their prices are competitive. Consider the fact that I’ve purchased from them both recently and frequently, and you can start to see how they are making a fundamental marketing mistake.

Sending me discount coupons is costing the company 10 percent that they don’t need to spend… because I’d have bought the products from them regardless of the discount. (They already have low prices, remember.) Add to that any other customers who’d also have ordered without the additional discount, and Horse.com is losing a few thousand dollars – at least! – from each coupon they’ve sent out.

You May Be Making the Same Mistake

Sure, offering discounts is a great way to get some people to buy your products. But offering discounts when they aren’t required can be costly. Many businesses offer discounts to everyone, even if they don’t need to. If you’re doing that, it tells me you are marketing solely based on the possibility that your price is a barrier to your prospective customers’ making a purchase – offering a price discount to some people for whom price is not a barrier (if it is, indeed, a barrier for any of your prospects).

I see examples of this all the time.

Yesterday, I needed to buy a backpack-style child carrier for a forthcoming camping trip. I’d done my research and decided on which one to get. And I planned to buy through REI, where I’m a member of the company’s rewards program. Last week, I visited REI’s website and discovered that they had a 20-percent-off coupon for members. Great for me – I saved $48. But REI lost $48 they didn’t need to, as I’d have bought the carrier from them anyway.

But coupons are a tried-and-true marketing strategy, right? So, when should you use discount coupons to stimulate sales?

Almost never.

Price is seldom the only factor in a purchase. If your competitor offers cheaper prices than you do (or, possibly, cheaper than you ever could), look for another way to best them. Maybe it takes ages for them to get their orders out… or they never answer their phones… or they are frequently out of stock. So what if your prices are higher? If you tout your excellent customer service, include testimonials from satisfied customers with glowing reports of prompt delivery and great service, you can win over people who prize those benefits over the lowest possible price.

If you seek to compete only on price (which is one perception discount coupons tend to inspire in your customers), you are commoditizing what you sell. This means you’ll end up competing on the same field with companies that have much bigger buying power than you do. Instead, try focusing on non-price reasons to buy from you.

When You CAN Use Discounts

You definitely can stimulate sales by price discounting. If you want to test it, you can offer a discount on their first order to attract new customers. Of course, this isn’t a perfect test, because you’re offering an across-the-board discount and you will be discounting to people who would have bought from you anyway. But because it is so costly to acquire a new customer (as opposed to keeping your existing customers), you may still want to test the discounting approach for finding first-time buyers.

Let’s say, for example, that the cost of acquiring a new customer for your company is $75. And that by discounting your initial average order value, you can bring in a customer that you then are able to retain for less than $75. If this is true, it may be worth testing an initial-order discount coupon.

You can also analyze who is buying from you and offer price-based incentives only to certain customers who make infrequent or irregular purchases. A simple way of doing this is to use RFM (Recency Frequency Metrics), which can help you find out (1) which of your customers recently bought or performed a transaction and (2) the number of times a customer has bought something or performed a transaction. In Drilling Down, Jim Novo’s excellent and detailed book on business and marketing analytics, he outlines this strategy in detail.

It’s Okay to Say No

Many businesses will do anything to notch up a sale, even if it costs them to make that sale. I’ve seen many businesses, both product- and service-based, that will slash prices or offer unprofitable incentives to win a sale. But it’s okay not to make a sale if it costs you to make that sale.

That said, there may be a difference between spending money to acquire a new customer and spending money to get an existing customer to buy. If you have your cost accounting in place, you should know whether acquiring a customer at an immediate loss is acceptable. In certain types of marketing campaigns, breaking even at 80 percent or so (bringing in only 80 cents on the dollar initially) in order to acquire a new customer or to get the name of a new customer is acceptable. That’s because, over the customer’s “lifetime” (or amount of time she continues to be a paying customer), her value is many times the cost of the initial acquisition.

It’s best to use discounting when you know your customers and exactly how much they’re worth to your company. If your discount offer attracts people who only make purchases when they can save a few bucks, you will probably never be able to make a profit by having them as customers. Allow your competition to service unprofitable sales while you focus on how to make sales to the right type of customers.

One thing to focus on is how quickly you can market to each customer to win repeat sales. You should consider how discounting impacts your sales cycle and profitability, and look at ways of marketing so that customers who don’t need discounting receive different types of offers. Doing so can allow you to offer discounts while still pushing up your average order value and profitability from every order, every customer.

For example, you could look at your sales records or customer database and analyze which of your customers have both placed orders recently and ordered from you frequently. These customers are less likely to need price discounting to make them purchase again in the future. Plus, since they’re frequent customers, they are more likely to respond to other product offers you send them. So look at non-discount methods of getting them to buy more from you.

Customers who buy infrequently – or those who have not purchased in a while – may respond to coupons for discounts or free or upgraded shipping, or to offers that sell a second product at a discount. Test what works and see how this impacts future sales from the same customers.

To Discount or Not to Discount

It’s difficult to give a hard-and-fast set of rules to cover discounting. It depends on your business, your customers, and your profitability; on how much it costs to acquire and retain a customer; and an estimate of a customer’s lifetime value. Offering a flat discount to everyone is probably at the “don’t” end of the scale, and analyzing your customer types and testing different types of discounts to these discrete groups is definitely at the “do” end of the scale.

I would feel safer marketing at an initial amount below breakeven (if, for example, I spend $1,000 on marketing but bring in only $800) with a business like ETR. That’s because ETR has a solid understanding of the lifetime value of a customer, and knows whether that lifetime value is high enough to warrant an initial “loss.” But if I were in a small business where the lifetime value of a customer was uncertain or where there was high price competition in the market, I probably would not offer willy-nilly discounts to all customers.

One thing is clear: When discounting, it’s important to understand how discounts affect your sales – but it’s perhaps more important to understand how much your discounted sales are costing your business.

[Ed. Note: David Cross is Senior Internet Consultant to Agora Publishing in Baltimore and one of the core contributors behind ETR’s new Internet business-building program.]

Although David hails from Blackpool, England – which is often referred to as the “Las Vegas of England” – he shunned a career in show business and instead followed a meandering career path overflowing with “life’s great experiences,” working or living in over 20 countries along the way. Chef, teacher of Transcendental Meditation, guest presenter on QVC, earthquake relief volunteer, CEO of a web hosting company, marketer at a radio station and all combined with years of direct marketing, PR and sales experience for clients as diverse as health food stores, small charities and right up to multinational public companies. David brought unique talent and experience to his role for six years as Senior Internet Consultant to Agora Publishing Group. Working closely with Agora’s publishers and marketers to test new ideas and marketing campaigns, Agora’s Internet revenues topped $200 million in 2007. David understands and can communicate fluently with creative “right-brain” marketers and analytical “left-brain” IT and software teams, all with equal ease. He has a proven track record for generating results and creative thinking and excels at making trouble to find new ways of making things happen! He lives on a small farm close to Mount Hood in Oregon with his wife Cinda, a veterinarian, and their four children and a menagerie of animals (no more, please!). When not marketing or brainstorming you’ll find David following a dream of self-sufficiency for food, power and water within 10 years, tending the land and caring for the farm and animals. Not surprisingly, David is an engaging and knowledgeable speaker with many amusing anecdotes from his work and travels over the years.

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