Discounts, Coupons and Customer Service

Below is a paraphrase of a friend’s issue with her business:

“I started accepting coupons from my competitor (large National chain). I have rules about minimum purchase and people want me to honor those coupons without minimum purchase and they are also bringing in outdated coupons. I also run a promotion where I give a discount of 10% off a future purchase if a customer spends over $100. They need to bring in their receipt that has a coupon. I have customers demanding the discount from my workers without the coupon, expecting them to just remember. I would rather these customers spend their money with my business, but I feel I am being taken advantage of. How do I set the rules? What boundaries should I set?”

I will start by posting a link to a great article by Bob Phibbs:

7 Reasons Coupons Don't Work

While I don’t agree 100% with doing away with coupons and/or discounts, they should be used judiciously and they should be self created. My opinion is that accepting a competitor’s coupons is not a good strategy. You have to remember that your competitors may have better buying power to get their inventory at lower rates than your business. You are also giving your competitors control over your pricing strategy by accepting their coupons. Your pricing strategy is critical to the profitability of your business and should never be put in the hands of a competitor.

I used to accept competitors coupons at my bagel stores. Some other stores in our area ran similar promotions as us, such as “buy a dozen bagels, get 6 free,” so we accepted their coupons. However, our second year into running our store, a large national chain opened up within a mile of our location. They had a big media blitz and ran a coupon giving away a baker’s dozen with no purchase necessary.

My partners and I talked it over and we were all in agreement that it would kill our business to honor that coupon. So we stopped that practice immediately, recognizing that we would probably lose some customers for changing that policy. Our rationale was that if they came to our business expecting something for free, they weren’t really customers and we could stand to lose them.

I value customers and believe in developing customer loyalty. I am also aware of the fact that I have to convince my customers that I am better than my competitors to develop that loyalty. The reality of the situation is that I can only be better than the competition in a few ways. I can have better quality, better service, more convenience and perhaps a selection that is more tailored to my local market. I recognize that I probably can’t compete on price alone, as I just don’t have the resources to be a low cost competitor. If that is all that is important to a particular customer, then I know that this will never be a loyal customer to my business.

Yet here lies the conundrum. Isn’t it better to make a discounted sale than no sale at all? It is tough running a business and every dollar of gross profit contributes to covering the overhead. If a customer has $50 worth of merchandise that cost me $30, wouldn’t it be better giving them that purchase for $45 and take a $15 profit rather than letting them walk out with nothing and no profit?

It is difficult for me to say this, but I still will. As a business owner, I have to stand firm on my pricing and not give in to discounts that are customer driven. Discounts should be driven by my decisions. If we choose to let customers dictate our pricing, we are turning over our business plan to our customers. I love my customers and recognize that I need them to make my business successful; yet they don’t understand enough about what it takes to run my business to dictate their own pricing. They are thinking only of themselves, whereas when I set my pricing structure, it was with the intent that I could give my customers a benefit and maintain profitability.

Are you still not buying my advice? Let’s project that previous scenario a bit into the future. You give that customer her 10% discount and she buys that item for $45. It is the last one on the shelf. Your next customer comes into the store and wants that same item. She is a loyal customer who has never asked for a discount. You just lost $5 in profit potential and probably a bit of good will. Or let’s say you did have another item and you sell it to that loyal customer for $50 and she finds out someone else got the same item for $45. You just lost some more good will.

Discounts and coupons can still be a tool to help promote your business, but be selective and have a clear game plan. Are you trying to speed up the turn of slow moving inventory, trying to eliminate waste of perishable inventory or are you trying to introduce a new product line? Are you trying to increase the average ticket per customer or do you want to reward customer loyalty for reaching a certain benchmark in spending? If you have a legitimate reason, discounting and/or coupons may be a good tool for your business.

To directly answer my friend’s question, I suggest that you set clear rules for pricing based on what you feel is best for your business and stick to your guns. If you are going to discount, make sure it is a means to an end, not a reaction to a customer request. Nobody can take advantage of you unless you allow it. I refer you to my previous post.

Your customers are a precious commodity to your business and you should focus on developing a service policy that makes you stand out from the competition. Don’t confuse providing discounts with providing good customer service. After all, if your business is not profitable, you won’t be able to provide great service to any customers in the future.