Giving Discounts to People Who Could Pay Full Price a Waste of Revenue?

Last month, one story covered how consumers in the United Kingdom still prefer the traditional paper coupons used in offline shopping over the digital coupon codes used in online shopping. Now, one reader asked how this trend applies to products available only online. One such product is webhosting.

Web hosting businesses, like most software companies, have been combining coupon marketing with affiliate marketing; They send their coupon offers to their affiliate partners, who then promote these discounts via newsletters or blogs. These voucher codes generally reduce the price of webhosting service by 20 to 50 percent, and the affiliate partners take their share of the revenue as well.

Webhosting providers have a way of knowing whether their vouchers are being redeemed by new or existing customers.

The same reader asked if acquiring new customers is the whole purpose of coupon marketing, why do web hosting companies send discount offers to existing customers who would buy at full price anyway? In this article I make a few points in relation to this question.

Products With Big Margins Allow Big Discounts

At first glance, giving discount codes to existing customers seems too good to be true, and like a terrible loss of potential earnings. However, certain businesses can still make money with such offers, either because their margins are relatively high or because their customers end up spending more money than they planned.

Since web hosting companies are selling software, they fall into this group. If a webhosting company creates its own server and limits each customer to 50MB of space on it, they’ll only have to worry about maintenance expenses. This kind of product doesn’t require delivery or shipping, which means that bringing in little or no new business doesn’t necessarily lead to revenue losses.

Retain Existing Customers With Price Incentives

When giving voucher codes to customers who would’ve probably bought the services at full price, most businesses can’t draw any concrete conclusions. We can, however, make an educated guess that some percentage of returning customers would not have come back without a voucher. Plus, it’s important to remember that the web hosting industry itself is somewhat of an outlier. A lot of webhosting companies make more money by getting more business from existing customers that have been inactive, over gaining new ones.

Have a Long Term Strategy

How can we tell whether a coupon marketing strategy is a losing proposition or not? The 80/20 rule gives the answer. Assume 80 percent of purchases are from existing customers, and 20 percent of purchases are made by new clients. Looking long term, those 20 percent of purchases will eventually lead to additional new customers. The reason is simple: word-of-mouth marketing. Newly satisfied clients will promote your business to their friends and family, which might lead to a snowball effect.

Differentiate Between Digital and Physical Products

Things are a little different for businesses selling physical products, where margins are generally very tight. In this case, it might be for the best to disregard the 80/20 rule and the balance between existing and new customers. Merchants dealing with low margin products should take a look at their business and consider whether their vouchers should go to existing customers at all. In most situations, the best way to go about it would be to have coupons apply to new customers only. Of course, every industry comes with its own rules and regulations, so this decision should be carefully considered.

Provided by Alex Papaconstantinou of Wikigains.com

Matthew Stathis is a blogger and digital marketer who has been free of the nine-to-five rat race since 2010 when he built his first online business. He closely follows the advances in the area of health and technology and enjoys reporting on things we didn’t know before. When he doesn’t work on his businesses, chances are he is wearing a backpack traveling around the world.