On Tuesday (Oct. 6), pricing strategy consultant Rafi Mohammed wrote an article for the Harvard Business Review that analyzed the logic behind Bed Bath & Beyond's "ubiquitous" 20% coupons.
The context surrounding these coupons is important. Mohammed is forecasting a difficult holiday season for most brick-and-mortar retailers due to expansions made by Amazon and Walmart, both of whom are ramping up online promotions and faster (or in certain cases free) shipping.
Since it's unfeasible for brick-and-mortar retailers to match web prices because the latter have lower operating costs, Mohammed suggests "surgical-strike discounts to entice customers who are at risk of defecting due to a cheaper price."
Don't demonize coupons because they take a chunk out of your profits. They might be preventing an even bigger profit dip.
Essentially a coupon is a means of testing your target market, to see just how many of your walk-in customers are price sensitive. Mohammed singles out Bed Bath & Beyond because its 20% off postcards helped the company increase overall sales in the most recent quarter.
"But increased coupon usage is starting to hurt the company’s net profit, which dropped by 10%," he wrote. "The company’s CFO highlighted 'an order of magnitude' increase in coupon expenses—primarily higher redemption rates—as the key culprit for the profit drain."
Mohammed argues that without the coupon strategy, BBB's profits could have been even lower. "Since Bed Bath & Beyond hasn’t mentioned a material change in its couponing strategy, the increase in redemption rates is a sign that more customers are becoming price-conscious. With customers becoming more price sensitive, consumers started using the ubiquitous coupons — instead of not purchasing from Bed Bath at all."
For today's brick-and-mortar retailers, driving foot traffic from people who would otherwise be shopping online, is vital.
"Providing the 20% discount option grants thrifty customers—an increasing number of whom likely would have purchased from an online retailer—permission to shop at a brick-and-mortar retailer where they assume the prices are relatively higher. So while an increase in coupon redemptions isn’t optimal, some margin is better than no sale at all."
So the take-home message here? If you're a brick-and-mortar retailer, offer coupons and closely monitor their effect on overall sales. While the redemption rate may hurt profits, it might not be a bad thing. What's important is that people are coming in to buy, and connecting with your brand. In the long term, you'll have to select when and why you offer coupons, to a) ensure long-term profitability and b) identify just how price conscious your shoppers are at a given time.