Every business owner has to start somewhere. IndoorMedia’s CEO, Doug Endsley, started his career working in fast food and moved on to found the nation’s largest in-store advertising company. In our Business Growth Leadership Series, Doug discusses the events that led to his current success and how today’s entrepreneurs can learn from his decades of experience.
If you plan on being in business for a long time, you need to make sure that your investments are profitable. I’m sure you know how important making profit is, but you may not understand how exactly to measure the return on investment (ROI) for a coupon advertising campaign. Following these four straightforward steps will help you evaluate your promotion-based advertising correctly so that you can spend your time (and money) on advertising that works.
1. Understand Coupon ROI
For our purposes, return on investment is defined as the total amount the customer spends with the redemption of a coupon, multiplied by the total number of coupons redeemed. Many times this ROI is not tracked properly because businesses do not capture the actual amount spent with the redemption, and instead use the minimum purchase requirement necessary to validate the coupon offer.
For example, Burger King distributes a coupon offering a BOGO or Buy One Whopper and Get One Free. Whoppers retail for $4.59 each so a business owner may identify each redemption as generating a $4.59 sale. Instead, the ROI should be evaluated on the actual amount generated on average, which in this case is $11.72, not $4.59. This actual amount spent is called overbuy, which I will discuss more below.
2. Track Your Redemptions
When I advertised on grocery receipt coupons as a McDonald’s owner-operator, the most important thing I did was track the usage of coupons by using a button on our point of sale system to indicate the discount on each transaction. Each time we reconciled the drawer, we counted the number of physical coupons we had collected and compared that to the total number of discounts rung up on the receipts. By using a simple spreadsheet to track these numbers, it was easy for me to evaluate the overall success of the program and the success of each unique coupon offer by measuring which ones were redeemed the most.
3. Know Your Average Overbuy
You’ve worked long and hard to create prices for your product or service that are fair for your customers and profitable for your business. So when an advertising program asks you to discount those already fair prices, it may cause you indigestion! Don’t fear. Coupons are a popular way to advertise because they drive profits for the business owner. The key is to make the perceived value higher than the actual discount.
As a consumer, you may have experienced this phenomenon with a $5 off $20 or more purchase. You perceive this offer to have a 25 percent discount value, go crazy, and end up at the register owing $52! After factoring your coupon into the price, your total cost comes out to $47. You, the consumer, got everything you wanted and saved $5, so you walk away happy with your shopping experience. The business owner also wins because with an overbuy of $47, the actual value of the discount dropped from $5 off $20 (25 percent) to $5 off $52, or a 9.62 percent discount.
This is why knowing your average overbuy is crucial to coupon advertising success. When you understand the average amount of money a customer spends in one visit, you can offer an aggressive discount that is enticing to customers and still profitable for your business.
4. Measure Your Success
To measure the success of your ad campaign, a simple formula to follow is:
Average Overbuy X Total Coupons Redeemed = Sales Revenue generated from promotions
– Cost of Goods Sold (This is the wholesale cost of goods.)
– Cost of Giveaway (This is the wholesale cost of the discount.)
– Cost of the Ad (Amount paid to RTUI for coupon distribution.)
= Profit generated from your coupon promotion.
Try this formula with your own product or service! If you get stuck or need more information to fill in the blanks, leave us a comment below.