Sunday, October 4, 2009

Coupons - Are they worth it?

I touched on the issue of Coupons before in an earlier post. Are they worthwhile, or just a gag to encourage us to spend more?

What prompted my reflections on this subject was the arrival in the mail of yet another "coupon book" from BJ's Wholesale, a big-box discount warehouse. After reading the coupon book, I had several questions:

1. Why not just lower the prices for the time period indicated by the coupon, instead of keeping the price high and offering a coupon?

2. Is the coupon book merely an advertisement disguised as a discount promotion?

The answer to the second question is "Yes" and that, in turn, answers the first question.

In economic theory of pricing, the optimal return for a retailer occurs when each consumer market segment pays what they feel to be is a fair price for a product. Thus, if you can get a rich person to pay $100 for an item, a middle-class person to pay $75 for the item, and a poor person to pay $50 for the same item, then you have maximized your market revenue. Each person in each social class has paid what he thinks the product is worth, and provided that amount is more than the cost to you, you make money. Selling to all three customers at the bargain price of $50 makes no sense, as you are leaving money on table, when it comes to wealthier customers.

Such economic theories have been used in the past to explain pricing schemes such as coupons, rebates, and the like. For someone who is not price-sensitive (i.e., wealthy) the product is sold at "full retail price". More price-conscious consumers might wait for the item to go on sale, or be discontinued or closed out, or maybe moved to the scratch-and-dent section. Coupons and rebates are another way of targeting the price-conscious consumer. By offering an effective lower price for those willing to spend the time looking for it, the retailer maximizes his income, right in line with economic pricing theories.

Another theory is that manufacturer's coupons encourage consumers to try brand-name products by offering them at attractive prices. The theory is, if the consumer tries Wheaties just once, they will change brands forever. Thus, the coupon is a loss-leader that entices the consumer to switch brands.

Another theory is that coupons can be used to gather market data. By tracking coupons (and yes, I wrote a Patent on this) marketers can determine which people from which zip code (and thus demographic area) buy which products. Since zip code is tightly linked to income and educational level, one can tell a lot by how many coupons are redeemed in certain areas.

Another theory is that coupons, when used in advertisements, encourage consumers to go to a store to seek out the alleged bargains. Similarly, offering double or even triple coupon discounts (remember those days?) encouraged consumers to go to a particular store over a competitor.

But the coupons from the wholesale club fail to fall into these patterns. To begin with, these coupons are mailed out to all members, so everyone has access to them. Moreover, when entering the store, racks of such coupons are available to the consumer. In other words, very few, if any, members of the wholesale club are paying "full price" for the coupon-discounted items, as the coupons are available to everyone, and the members are trained to look for the coupons before buying.

As I noted in my earlier blog on big-box stores, the coupons at BJ's Wholesale end up being little more than clues to an in-store treasure hunt - directing consumers to seek out certain purchases and impulse buy items they did not intend to buy when entering. And even stranger, many of the coupon "deals" are more expensive than comparable goods on the adjacent shelf. Not only is the consumer not saving money using these coupons, often they are the worst deal in the store (well, the only worse deal is paying full retail for the couponed item).

Stranger still are the "instant coupons" proffered on some items. You purchase the item and then scan a coupon attached to the item for an instant discount. Only a brain-dead person would fail to ask for the discount that is so freely offered. Why these "instant rebates" are offered in the first place is an interesting question. No market research data is accumulated, the consumer is not encouraged to go to the store, and no optimal pricing takes place.

Why not, instead of offering an "instant rebate" just lower the price instead?

I think the answer lies in what I call "Bob's first law of Economic Transactions" which states as follows:

"The more complicated you can make any economic transaction, the easier it is to confuse the consumer and thus hide the actual price or other terms, and thus make more money."

Or to put it more succinctly: "The more complicated a deal, the greater chance it is a rip-off".

As I have noted in the past, car leasing is a perfect example. By hiding the purchase price and interest rate and selling only monthly payment, the car dealer can more easily deceive the consumer into paying too much in terms of both price and interest on the car he has bought (and he has bought it, believe me).

Similarly, the coupon acts as a confusing agent, skewing the mind of the consumer, who may be blinded by the bombast of "bargain" and thus make a poor choice.

Instant coupons loudly declare their existence. The consumer subconsciously thinks they are getting a deal, when in fact they are not. The bag of potato chips with a "50 cent instant rebate" is no bargain if the competing brand is a dollar less. And the bag is certainly no bargain if the consumer originally had no intent to buy the product when entering the store (the impulse purchase).

Similarly, the "coupon book" mailed out by the wholesale club is merely an advertisement and an inducement to go back to the wholesale club. If labeled as an ad-sheet, most consumers would merely toss it in the trash, along with the ad-sheets for competing markets. But when the ads are couched as valuable discount coupons, the consumer reads them and saves them, and makes a mental promise to visit the shopping club soon.

The Wholesale clubs, as I have noted, do have some good bargains, provided that:

1. The products you are buying are what you intended to buy and not impulse purchases;

2. The products are actually cheaper than competing markets; and

3. The bulk size of the product does not encourage over-consumption and waste.

The coupon book attacks premise #1 with a vengeance and does good damage to premise #2. By offering "discounts", the coupon book encourages you to think about buying things you had not previously considered. And by acting as a confusing factor, they get you to pay more for a product than you should.

So are coupons a total waste of time? For the most part, probably YES. Simply shopping based on price comparison alone will likely yield a similar if not superior result to "coupon shopping". No matter how strong your resolve is, chances are, you might change your shopping list to include a couponed item, merely because it is a perceived bargain. Regardless of whether it is a bargain or not, if you did not intend to buy it originally, it ends up only being an additional expense.

And yes, the couponing industry does promote couponing - they hype it. As I noted before, local television stations (often starved for real news) will do human interest pieces about a local couponing consumer who goes to the local Safeway and walks out with bags of groceries for a dollar.

But such stunts (which is often what they are) are often staged and often rely on the couponer simultaneously spending a number of valuable manufacturer's coupons at once. The average "take" for the couponer may often be far less. And again, if you end up buying things you didn't want in the first place, is couponing such a bargain?

Of course, this is taking aside the amount of time and effort needed to obtain, sort, store, and use coupons, which can consume hours. Of course, it makes no sense to turn away a coupon for a staple item that you ordinary buy. And of course, at the warehouse store, it makes no sense not to use their coupons, as the entire price structuring system is based on it. The hard part is to resist the temptation to buy something you did not initially intend to buy, based solely on the presence of a "coupon".

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