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September 04, 2007

The Lifecycle of a Coupon


Do you remember the articles such as “I am Joe’s pancreas” in Readers Digest describing how parts of the human body worked? Perhaps this article should be titled “I am Jane’s coupon”.

My son asked me why women wear makeup. Not really knowing, and nervous that my wife was casting me a glance, I responded that once the first woman did, she had an advantage over other women. The rest of the women chose to follow suit or be left behind in the areas where perceived beauty paid dividends. It’s been a powerful practice not easily eliminated from our society.

I don’t know when the first coupon, as we know them, was offered (probably some time after the printing press was invented), but that manufacturer found a sales advantage which competitors had to imitate. Do you think stores like dealing with coupons? You may conclude, after reading the below article, that they would like to see them disappear. Many have predicted that, with online shopping and all the electronic communication methods now in use, the paper coupon would disappear. However, it remains stronger than ever. After all, coupons are free money with decades of consumer momentum continuing to push their usage.

Let’s examine the lifecycle of manufacturers’ coupons; how they are typically created, how they get to the consumer, and how stores redeem them to get their money back.

The Manufacturer Manufacturers of consumer goods are always looking for ways to increase sales. Coupon promotions are one way. Many factors are involved in creating a promotion. The coupon design, value, method of distribution, validity period and other parameters all have to be determined and are contained in basic marketing knowledge. The basic knowledge is tailored according to the specific industry of the manufacturer. And finally, manufacturers keep statistics on the success of prior coupon promotions. They take their best shot on the coupon campaign based on marketing knowledge, either from their internal experts or from consultants, and then compare sales or revenue before and after the promotion. With time, a manufacturer learns which promotions work and which don’t. Are there ever surprises? Most definitely. Many have been the promotions which cost more than they made.

Distribution Channels The manufacturer now has to get the coupons to the consumers. There are many methods for this. Free Standing Inserts (FSI) are placed in newspapers and magazines, coupon packs and post cards are direct mailed to consumers, coupons are dispensed in-store at the point of sale (POS), coupons are obtained online, or flyers may even be left on a home porch. When I was a teenager, our scout troop had a project where we arranged for flyers to be printed for local companies. On a Friday night we’d collate and staple the flyers together via a revolving table. On Saturday, we ran the flyers to the porches of about 30,000 homes. Our troop always had good money for activities. Later, a boss required me to place flyers on the windshields of all the cars in the mall parking lot. Manufacturers often have established distribution channels. Or, they may turn to marketing companies (such as manufacturers’ agents like NCH) who have the connections to distribute the coupons to newspaper/magazine publishers, mailers, stores, or online distributors (and maybe even boy scout troops).

Consumers Consumers are those who buy the manufacturers’ goods through the product distribution channels known as retailers. Consumers receive the manufacturers’ coupons through one of the distribution channels mentioned above. Consumers often trade information regarding where to obtain desired coupons, or even trade coupons. Coupons are valuable. If a coupon reduces the amount of your purchase by $1, that is $1.15 to $1.50 you don’t have to earn (based on your tax bracket). Thus, they fall in the category of “a penny saved is a penny earned”. I guess Ben Franklin wrote that before the days of big taxes. Consumers who use lots of coupons are called couponers. I’m always amazed at how much money some couponers save. Savvy couponers find a good coupon organizer to maximize their savings, save time by reducing clutter, and make couponing a smoother process.

Retailers The consumer buys the manufacturers’ products through a retailer, such as a grocery store. Upon checkout, the consumer hands money and coupons to the clerk. The consumer has saved money on her purchase. The manufacturer has hopefully influenced the consumer to buy their product. Life is great for the manufacturer and consumer. However, the retailer or store has just taken the loss for the coupon created by the manufacturer. The manufacturer needs to pay the store back for that coupon (redeeming). But the store carries products from so many manufacturers. Major chains collect millions of coupons. How is the debt reconciled?

Coupons are placed in till drawers along with cash. At the end of the day, cash from tills is counted. The cash value of coupons is also counted in order to balance out the till. The manufacturers’ coupons are then bagged and sent to the retailer’s headquarters, usually weekly (of course, this can vary by store size, etc. Smaller stores may process the coupons in-house and mail the coupons to the manufacturer’s redemption address on the back of the coupon. Retailers are typically paid 8 cents per coupon to cover the redemption costs). Large retailers box all of the coupons. They are still in the bags as sent in from the originating stores (can you see how important organization is in this process?) as the end goal is to get reimbursement to the individual stores. The boxes are then sent to a Retailer Clearinghouse.

Retailer Clearinghouse The Retailer Clearinghouse (typically independent from any one retailer) has to sort the coupons by manufacturer and yet keep track of which retailer they came in from. Automation is used to the extent possible. Coupons with readable UPC codes (bar codes) are place on a conveyor belt where scanners read the codes and compute the total value of specific manufacturer’s coupons in a batch. Some coupons can’t be read by machine due to damage, dirt, etc. These require added levels of hand processing to sort and tally. The whole process is labor-intensive. Is it any surprise that some clearinghouses subcontract part of the work to offshore clearinghouses where labor rates are cheaper? In the end, the clearinghouse has sorted the coupons by retailer and then by manufacturer. The coupons get sent to the individual manufacturers with invoices as to how much is due each retailer.

Back to the Manufacturer The manufacturer now has to pay the store for the coupons redeemed, as well as the clearinghouse for their work. If the store is small and does the entire coupon processing in-house, they will receive remuneration (coupon value plus processing fees) directly from the manufacturers. If the process has gone through the clearinghouse, the manufacturer may pay the clearinghouse who will keep their cut and then pay the store for the value of the coupons redeemed. Or, the manufacturer will pay the retailer, who will then pay the clearinghouse for their services.

Now that a coupon promotion has come full circle, the manufacturer is interested in at least two things; how successful was the promotion (did sales or revenue increase and by how much) and was there any coupon fraud (have you ever wondered how many jobs exist solely to prevent others from being dishonest or how much of your job overhead involves efforts to prevent dishonesty?)? There is accounting in every stage of this process. Just as a store’s tills must balance at the end of the day, the coupons claimed by a retailer must add up to the coupons returned to the manufacturer. If fraud is suspected, the coupons may pass through another clearinghouse.

A manufacturer may employ a manufacturers’ agent to generate coupon count reports as well as marketing analysis reports. Companies, such as NCH, can function as the manufacturers’ agent (designing the promotion and coupon, linking to the distribution channels, generating promotion analysis reports) and clearinghouse (providing this intermediary service for retailer and manufacturer).

Information in this article is the opinion of the author and is based on Mrs. A’s Corporation’s manufacturing and retailing experience, the process flow suggested at NCH (http://www.nchmarketing.com/us/ab/coupon.asp) and "How do store coupons work? How does the store get its money back?".  July 19, 2000  http://money.howstuffworks.comquestion426.htm  (August 31, 2007)

Copyright ©, Paul Stout, General Manager, Mrs. A's Corporation, 2007

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