Coupons Are Heroin

by Richard K. Hendrie

"Some industries… have always used price coupons to get new customers to try their products and to get old customers to come back more often. Chick-fil-a had qualms about the practice and decided to study the behavior of the coupon customers in detail. It discovered that customers who come in with coupons generally spend less, are less likely to give the store repeat business, and are very likely to use coupons during peak traffic hours, when handling coupons slow the lines. The company also discovered that loyal customers who do not have coupons feel short-changed, and that frequent price promotions tend to convince them that your product is not worth its normal price… Chick-fil-a now uses (coupons) primarily to introduce new products or packages."

— The Loyalty Effect by Frederick F. Reichheld

Recently, I conducted a seminar on Wall-To-Wall marketing. We covered the topic of coupons and discounts. When I asked who used that kind of price cutting strategy, many in the audience raised their hand a little sheepishly. I could tell that many felt ambivalent about the practice. But here's the rub. Coupons work. Yep, they drive traffic like mad. So much so, that the sound of the register ringing overcomes any qualms operators have.

The problem is that coupons are like a narcotic. They are addictive and, over time, work less and less effectively. At the end of the string, you have a brand that has been stripped of any of its intrinsic value proposition. It sits like an emaciated business ready for the Chapter 11 buzzards to descend and pick away at the remaining bones.

How do I know? I point to the pizza industry as prime example. Who here ever feels good about paying full price for a Pizza Hut, Dominos or Papa John's Pizza? The segment nearly orchestrated its own death with its reliance on price off and 'two-fors'. To this day, they continue to struggle with the legacy of discounting, having to spend millions and millions of advertising dollars to make a new case for the essential value of their products. That's a ghastly task to face.

QSR is not much better. What segment in the restaurant industry has worse value perception than QSR? What segment has relied on coupons and discounts more often? Take a look at CREST. The data shows a direct, if unstated, inverse correlation between customer perception of the degree of a concept's price discounting and its lack of value.

So, why do we do it? Because the sight of customers coming into the store, regardless who they are and whether they're likely to return, is too good to resist. Like any addictive high, it just feels too good to stop. As long as we're in the daze of denial about the long-term impact, it's groovy, baby.

What are the alternatives? First off, giving a customer a full retail value experience does not preclude you from giving them a break. The trick is to make it personal and a surprise. Reward your current guests. Surprise them with come-backers, or 'just-between-you-and-I' treats. I tell a story of being rewarded as a first time guest at a Mimi's Café with complimentary fresh muffins as I was paying my check. It knocked me out and I still talk about four years later.

Make it your business to create a 'club' around your brand. Starbucks, Krispy Kreme and In-and-Out Burger do not coupon, because the experience they offer is so compelling. I don't know about you, but I haven't seen a Wendy's discount. Their $.99 value menu is their special. It's been engineered to work for them and their guest.

Can you use a special offer to promote a new product? Sure, but position it as a limited deal and be clear that it's a "Special­One-Time Offer". More importantly, offer tastes of a new product to your existing guest base and create a windfall of word-of-mouth advertising. There's nothing better than a guest telling someone else, "You'll never believe what happened to me today at…" That's the kind of buzz you want.

So, sit down and consider the implications of your discounting tactics. I have seen companies wean themselves off of discounts to survive and thrive. You can do it. It may involve some withdrawal pain, but you'll live. Literally.

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Richard K. Hendrie is the Chief Experience Officer of Link Inc., a restaurant consulting and coaching firm. He does extensive speaking to industry groups and associations, offering keynote, workshop and seminar presentations.

Link Inc. © 2005