Modern couponing has been around since 1894 when Coca-Cola enticed customers with an offer for a free glass of Coke. The pitch was simple: Clip a coupon and redeem it at participating retailers. Stores were supplied with an extra two gallons of Coca-Cola syrup to handle the increase in demand.

More than a hundred years and four trillion coupons later, the basic idea is still the same. However, the past decade has seen considerable upheaval in couponing. Its effectiveness has been challenged, even as advances in techniques and technologies have opened up new frontiers. (For an overview of today's promotion techniques, see Doc. 6015, Promotion Guide.)

OVERVIEW

In general, coupons and rebates are used to increase sales and promote consumer loyalty. The goals of coupon and rebate programs are usually the same and can include: encouraging repeat purchase, increasing product awareness, getting consumers to try a new product, moving overstocked inventory, targeting specific markets, softening the blow of price increases, launching a new marketing campaign, trading consumers up, and responding to competitive pressure.

• Coupons are used to promote everything from tires to root canals, but it is in the area of packaged goods promotion that they have traditionally been king. A typical program involves a printed coupon certificate distributed via newspapers or magazines, through direct mail, or in-store. The customer redeems the coupon at checkout, and the retailer forwards it to a clearinghouse, or directly to the issuer, for reimbursement.
  
  
• Rebate programs often use coupons as a redemption vehicle, but they add a twist to the usual coupon deal. In exchange for fulfilling certain requirements, consumers get cash back from the issuing company. Usually, retailers are spared involvement: You can put the offer right on the package, and consumers mail in a proof-of-purchase that's redeemed at your fulfillment house. However, instant rebates are becoming common. Here, the consumer gets cash from the retailer. In some cases, notably the auto industry, the money is used to subsidize the initial purchase.

KEY STATISTICS

Following are some interesting findings and trends regarding coupon usage in 1998 from two monitoring companies within the industry: CMS, Inc. and NCH NuWorld Marketing Limited.

1998 Top Coupon Trends from The 1999 Coupon Fact Book from CMS, Inc.

Distribution: 1998 posted an increase in coupon distribution of 1 percent versus 1997 to 278 billion coupons. This is the first increase in distribution in four years.
Redemption: Coupon redemption was off slightly in 1998 at 4.7 billion versus 4.8 billion in 1997. The decrease in coupon redemption was driven by an 18 percent decrease in in-ad redemption.
Expiration Dates: The average expiration period distributed fell 10 percent to 2.8 months.
Method: Manufacturers used more than 30 methods of coupon distribution. Free Staanding Inserts continued as the dominant method of coupon distribution, increasing FSI share to 93 percent.
Face Value: The average face value distributed rose to $0.66 in 1998, an 8 percent increase over 1997.

1999 Worldwide Coupon Distribution and Redemption Trends from NCH NuWorld Marketing Limited

• Most consumers feel that coupons offer them substantial savings.
• More and more men are "always" counting coupons.
• More than half of all consumers agree that coupons influence them to try new products.

COUPONING AND REBATE TRENDS

Coupon Trends
Redemption rates have dropped slightly even as the number of distribution methods have increased and the number of coupons in circulation has inched up slightly.

In terms of distribution, Direct Mail, FSIs, Magazine-On-Page, and Sunday Supplement coupons all increased their shares of distribution. Three new electronic methods of coupon distribution continue to show popularity: Electronic Frequent Shopper, Internet, and Targeted Frequent Shopper. Although manufacturers continue to experiment with these new non-paper promotions, the slight increase in distribution indicates a return to the basic method of paper-based coupons. While FSIs continued as the dominant method of coupon distribution, its share of redemption decreased. Meanwhile, Bounceback, Consumer Response, Direct Mail, Electronic Shelf, and Instant Redeemable all showed increases in redemption rates in 1998. Shorter expiration dates (the average has shrunk from 3.4 months in 1996 to 2.8 months in 1998) are another cause of declining redemption rates.

Some companies are simply taking a more targeted approach by using advanced database technology to hit select consumers. More consumer information is being collected at the checkout counter, often through preferred-shopper or frequent-buyer programs. This data, combined with barcode tracking, enables marketers to put together detailed consumer profiles and target promotions accordingly.

In 1998, the average face value distributed rose 10 percent to $0.66. This increase in face value was due to manufacturers continued use of the universal coupon, a high-value coupon good on multiple products within the manufacturers' product lines. Almost one-quarter of coupons distributed in 1998 included multiple purchases. This indicates that manufacturers used coupons to move product.

Rebate Trends
With rebates, there has been a proliferation of tie-in programs involving multiple products from different companies. For instance, entertainment companies increasingly use supermarkets and mass merchants as a retail outlet for videos, and this has led to an outbreak of rebate programs involving videos and a variety of other merchandise.

NCH NuWorld Marketing Ltd., the nation's biggest coupon processor, says the use of traditional cents-off coupons is down, but its mail-in business is increasing, especially for higher-priced items such as office products.

Rebates are becoming more popular among manufacturers mainly because most consumers never cash them in! Market Growth Resources Inc., a consulting firm, reports that only 5-10 percent of consumers redeem a rebate offer. In addition, however, manufacturers like rebates because they let them offer price cuts to consumers directly, as opposed to a traditional price cut where retailers can keep the price on the shelf the same, and pocket the difference. Since many consumers never bother to redeem rebates, essentially the manufacturer can offer "phantom discounts." Most advertisements feature the low price, with the required rebate information in small print. Rebates are also much more flexible than couponing. Long lead times, typical of coupon offers, is not required with rebates, and rebates can be canceled more quickly.

Rebates do have their negatives. Many consumer advocates feel the manufacturers should offer a more fair reduction in price. If you miss an expiration date, or forget to keep your sales receipt, etc. you cannot take advantage of the offer. In addition, there have been some complaints that some consumers failed to receive their rebate checks.

TYPES OF DEALS

There are many types of coupons, including the following:

Coupons

• Cents-off or dollars-off.
• Free.
• Buy-one-get-one-free.
• Multiple-purchase. The consumer is required to buy more than one of a given product.
• Time-release. Coupons with different expiration dates are distributed together to encourage repeat purchase.
• Self-destruct. Coupons are printed to overlap and consumers choose one deal or another.
• Crossruff. The consumer gets a coupon for one product, often related, when purchasing another.
• Sweepstakes-entry or personalized. The coupon can be redeemed only at specific locations, such as a chain of stores.
• Universal coupon. Manufacturer distributes a high value coupon good on multiple products within the manufacturer's product lines.

Rebates

Among rebate deals, there are innumerable variations on what the customer must do to get the rebate. It might be a simple proof-of-purchase for a single product, a combination of proofs, or the purchase of several different products. Often, when marketers get together for a promotional tie-in, redemption gets complicated. For example, customers may be required to buy four quarts of motor oil from one company plus an oil filter from another in order to get a rebate.

WHEN TO USE COUPONS AND REBATES

Increasing product movement is the main job of coupons and rebates, but marketers have a number of specific uses for them, including:

Introducing new products. Sampling is the most dramatic way to get your new product into the hands of prospects, but it's costly. Coupons and rebates are an alternative. Caution: Launching a new product with discounts can tar it with a low-price image that will undermine your long-term positioning.

"Pantry loading." At times, you want to get dealers, distributors, and consumers to stock up on your product so they have no room for competing products. Coupons and rebates are a reliable means of spurring bulk purchases.

Increasing trial. Whether your product or service is old or new, coupons or rebates can be used to promote trial among a new target audience.

Promoting sell-through. Once you've sold your products into the appropriate distribution channels, you might use coupons or rebates to make sure they sell through to the consumer or end user.

Building a database. Companies sometimes offer a rebate when they want to build a database of likely prospects. This enables them to track purchasers, who must provide their name and address in order to receive their check.

CRITICAL ISSUES

• Design. To be effective, a coupon has to have the right look. For most applications, it should appear clean and uncluttered. And be sure the coupon looks like a coupon. That means making the offer big and bold (forget clever headlines), having a prominent expiration date, and putting a clear border around the coupon if it is to be cut out of an ad or circular. Also, since coupons tend to increase the pull of an ad, it pays to design the ad around the coupon and make the coupon offer the centerpiece of the ad's message. Important rules and restrictions, such as those used in rebate offers, should be spelled out clearly in large type on the face of the coupon. Boilerplate and legalese can go on the back.
  
  
• Redemption rates. As a rule, you can expect a 2 percent redemption rate in packaged-goods couponing. For rebates, it's 3 to 5 percent. These are general figures, since the delivery method may affect the redemption rate dramatically. For instance, on-pack, instantly redeemable coupons often enjoy redemption rates exceeding 50 percent, while rates for on-page magazine coupons average less than 2 percent. High face value, easy terms of redemption, and delivery close to the point of purchase are three factors that increase the redemption rate.
  
  
• Face value. In packaged goods, the face value of coupons generally ranges from 25 cents to a dollar or more. That's great for cereal, but what about big-ticket items? For most programs, 10 to 30 percent of purchase price is a reasonable range for coupon face value.
  
  
• Budgeting. Among the costs associated with any coupon program are: face value, creative and production, distribution, handling (a per-redemption fee paid to retailers) and redemption (mainly tracking and tallying, usually performed by a clearinghouse). Given an accurate estimate of the redemption rate, it is possible to calculate a per-redemption cost as well as the return on investment.
  
  
• Redemption. It usually takes 60 to 90 days from the time a coupon is issued until it gets back into the marketer's hands. First, the coupon is produced, either printed on its own or as part of other media. Next, the consumer redeems it at retail. At that point, the retailer has several options. The store may redeem the coupon directly with the issuer, use a clearinghouse, or work through a redemption agency. Manufacturers often offer retailers a cash rebate to cover the cost of handling coupons.
  From the consumer's standpoint, it shouldn't take much effort to redeem a coupon, but that doesn't necessarily hold for rebates. Here, redemption is made difficult by design, because manufacturers are counting on a high slippage factor to hold down costs. The idea is to get maximum promotional value by offering an attractive rebate, then make the qualification requirements so complicated that a high percentage of consumers will fail to claim the rebate by the expiration date. The strategy works, since with rebates the consumer acts after the purchase is made. The back end of a rebate program is often handled by a fulfillment house.
  
  
• Redemption Rates. As a rule, you can expect about a 2 percent redemption rate in packaged goods couponing. These are general figures since the delivery method may affect the redemption rate dramatically. For instance, instant redeemable coupons often enjoy redemption rates exceeding 35 percent, while rates for magazine-on-page coupons average less than 1 percent. High face value, long expiration periods, easy terms of redemption, and delivery close to the point of purchase are four factors that increase the redemption rate.
  
  
• Avoiding fraud and misredemption. There's no way to avoid misredemption entirely. You always have to rely on the honesty of suppliers and retailers to some extent. The easiest way to avoid fraud is to use only on-pack or in-pack coupons, because they always wind up in the hands of people who actually buy the product. Otherwise, make sure you have an adequate tracking system in place. Barcoding on coupons, developed in the 1980s, provides an efficient means of determining if a particular store is producing a suspiciously large number of redemptions.
  
  With rebate or mail-in coupon offers involving proof of purchase, it helps to print a barcoded proof-of-purchase coupon right on the package, since tracking individual sales slips can get messy.
  Note: Some errors are to be expected. For instance, redeeming expired coupons or accepting coupons for the wrong products are often innocent mistakes.

CASE HISTORY: FREQUENT-BUYER CLUBS Create Many Options

A leading promotion agency developed a couponing program that takes advantage of the growing popularity of frequent-buyer clubs. It tailors coupons to individual customers, using data collected from 90,000 barcode scanners. Shoppers are issued a plastic frequent-buyer card, which is scanned at checkout, sending individual purchasing information into a database. This allows the agency to offer marketers an array of options. For instance, a customer buying Purina Cat Chow might get one of the following: (a) a cents-off coupon for additional purchases of Cat Chow or other Purina products; (b) a coupon from a competing cat food manufacturer; (c) a coupon for a related product, such as cat litter. The coupons themselves can be delivered through the mail or printed on the back of the sales slip at checkout.

USING COUPONS TO BUILD YOUR DATABASE

Two years after Coca-Cola developed the first modern coupon program in 1894, it added a twist by requiring consumers to write their name and address on the back of the coupon in order to redeem it. Not only was this the beginning of modern database marketing, but it showed a new way to profit from coupon programs.

Using coupons for this purpose is the exception rather than the rule, however. Traditional programs have usually taken a shotgun approach, flooding the market with coupons for an anticipated redemption rate of around 2 percent. Why? Because problems arise when you ask consumers to take extra steps: Redemption rates drop, and sorting the data adds overhead to the promotion.

Possibilities for database-building opened up quickly with the arrival of advanced technology. The explosive growth of preferred-customer programs has not only aided database development but introduced new ways for the database to be used for targeted coupon programs. The store collects detailed household data from customers when it issues them their cards. This information is stored in the retailer's database, so it's no longer necessary for customers to fill out the same information with each new promotion.

Barcode scanners at checkout read both the coupon and the customer's card, creating an instant cross-reference between the promotion and the individual's household data. This information can be neatly packaged and forwarded to the manufacturer to aid marketing research and pinpoint future mailings and other promotions. The cards also provide a means of tracking all the purchases an individual makes at a given store or chain, thus enabling marketers to target their promotions more accurately.

Data collection comes naturally to rebate programs. If they want to get the rebate, customers are eager to fill out their name and address, where they bought the produce, and perhaps even more detailed information.

CASE HISTORY: CREATING AN INSTANT DATABASE

When a leading provider of cellular telephone service was looking for an exciting way to boost fourth-quarter sales, its promotion agency suggested a flexible rebate and coupon plan. The plan used $25 "checks," each one imprinted with its own numbered identification code so that marketers could track and collect specific information about each recipient.

By using this technology, the agency was able to provide customers of the cellular company with a hassle-free redemption process. When customers signed up for the service, they received one of the customized, encoded checks, which they then sent to the agency's fulfillment house for redemption. There was nothing for them to fill out, because the checks had already been encoded with their name, address, and other information before they were mailed out.

The effect was to create a nearly instant database. As the customized checks arrived at the fulfillment house, the information was retrieved and the cellular operator knew right away who its new customers were. Not only were misredemptions kept to a minimum, but a single, accurate source of customer data was maintained throughout the process. The custom number also became the customer's permanent identification number, which could be used for future promotions.

FINDING SUPPLIERS

There are a number of general and specialized suppliers involved with couponing and rebates, and the ones you use will be determined by such things as your budget and the complexity of your program. Promotion agencies offer one-stop shopping and often subcontract the work to printers, clearinghouses, redemption agencies, and fulfillment houses. As couponing has become integrated with other promotion vehicles, full-service agencies are the logical starting point for any big program. Listed below are services and directories that may be of help:

Incentive magazine publishes a list of promotion agencies in its Annual Supplier Directory, published in its March issue. $10. Call 212-592-6963.

Promo magazine's Annual Resource Directory lists promotion agencies and suppliers and provides surveys, charts, graphs, and indexes on the industry. $50. Call 203-358-4375.

Potentials in Marketing magazine publishes a list of promotion agencies in its Annual Supplier Directory, published in Dec. $25. Call 612-333-0471.

Promotion Finders helps volume users track down specific promotional products or services; it gets a commission from suppliers if there's a deal. Call 809-725-3355.

To find a supplier, go to #9520, Supplier Finder.

ON THE WEB

Val Pak Direct Marketing Systems, one of the nation's largest distributors of coupons, has started an ambitious site to put thousands of coupons on the Internet. Visitors to the site, http://www.valpak.com, can type in their ZIP code and the types of coupons they are interested in, and Val Pak will insert those coupons in their next mailing to you, or they will e-mail the coupons to you and you can download and print them. Val Pak joins a growing number of services and individual merchants already offering coupons on the Internet. Analysts project tremendous growth in this area.

Some businesses are hesitant to use this form of coupon distribution given the chance that people have the opportunity to print an unlimited number of coupons. But some preliminary testing of this concept revealed that few people are taking advantage of this distribution system with rampant printing or redeeming.

ASSOCIATIONS

• Promotion Marketing Association (PMA) is the main association for people in sales promotion. Its members are mainly companies dealing in promotion services, sales incentives, and premium merchandise. PMA has a Coupon Council which can be reached at the main number. Call 212-420-1100; fax 212-533-7622; click on http://www.pmalink.org.

TRADE SHOWS

• Promo Expo, sponsored by Promo magazine, includes exhibits as well as seminars on the latest trends in sales promotion. October 3-5, 2000, at the Navy Pier, Chicago. Call 800-927-5007.

RESEARCH

CMS Inc., a promotion services agency in Winston-Salem, NC, offers a 36-page booklet called 1999 Coupon Fact Book. It includes statistics on coupon distribution and redemption. $250. Call 336-631-2500. Go to http://www.inmar-inc.com.

NCH NUWorld Marketing Limited, a coupon processor in Lincolnshire, Ill., has statistics on couponing. Call 847-317-5500. Go to http://www.nuworld.com/.

BOOKS

Sales Promotion Handbook, edited by Tamara Brezen Block and William A. Robinson, is a good reference book for anyone who wants details on any aspect of sales promotion, including couponing. 910 pp. $69.95. Dartnell Corp. Call 800-621-5463.

PUBLICATIONS

• Promo is a monthly magazine designed for people who make promotion marketing a regular part of their jobs. $65/year. Call 203-358-4375 for general information, 800-463-4054 to subscribe.
  
  
• Advertising Age. Although the traditional focus of this weekly is on advertising, it includes alot of news on promotion marketing. 52 issues. $119/year (2 years $190) Call 212-210-0100 for general information, 800-678-9595 for subscriptions.
  
  
• Brandweek, a weekly, bills itself as the publication of brand management, covering promotion marketing from the perspective of product managers. $140/year. Call 800-722-6658.
  
  
• Potentials in Marketing, a monthly, covers a range of subjects related to promotion marketing. Free to qualified users, otherwise $24/year. Call 612-333-0471.