Don’t Coupon What You Can Get For Free, or the Economics of Value

February 9th, 2010

I seem to be pretty unique in my attribution of value of products. I pretty much have an internal dollar amount in my head for every good I’d like to buy in terms of what much I would spend on it. This is the value that product provides for me. This value is in no way related to market value. Most consumers don’t necessarily have this quality. Consumers tend to abide by market value for products. So, for example, let’s say a leather jacket originally cost $500. It now costs $250, so it is discounted by 50% from market value. Person A might say this is a deal and buy the jacket. But let’s say my personal value for the jacket is only $100. This is still not a deal for me, so I would stay away. The jacket is bought by Person A, and Person A is now a customer of the store or brand of the jacket.

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With the economy still struggling, people are trying to save money, but instead of sticking to personal value, people are responding to discounts on market value. Just look at how coupon sites like Groupon and CouponCabin are doing (Congrats by the way on your success. Fantastic work). These sites have built value by providing consumers great deals, and providing businesses great exposure. Seeing the success of these businesses, I’m sure many other businesses are seeing what they can do to discount their products. Don’t be so quick to jump to this method.

Any business you create should revolve around a core value. For Groupon and Coupon Cabin, coupons are their core value. But if the service you provide is not coupons and you are just discounting your service in the form of a coupon, you may doing your business a disservice. Discounts are an extremely powerful motivator in consumer behavior, and that is a blessing and a curse. The blessing is that consumers really respond to them. Perceived, not necessarily real, discounts are a strong motivator, even if the consumer did not value the product at all at regular price. Discounts are primarily used as a marketing tool to entice purchases for things that don’t normally have value to users. This is the basis of high-low pricing in retail stores, and Wal-Mart’s antitheses, always low pricing. Sites like Groupon are using coupons to provide a large amount of exposure to local businesses that would otherwise have no way of getting that exposure. These are both valid uses of discounting.

But if you are now following the high-low pricing paradigm and you already have built awareness, the curse is that if you offer a discount, the value of your business before you offered a discount is replaced by that discount. Let’s say the core value at GrubHub.com to consumers is online ordering for delivery. If we offer a 10% off discount, our core value to consumers becomes “10% off delivery”. So, when we remove that discount, the consumer associates no value to our business. So, to entice repeat use, we have to offer that discount again.

As a business, you should focus on building a core value and have that value be something people are willing to pay for. If they are willing to pay for it, it has value. You can then elevate how much you can get users to pay by providing more value. Using a discount to market to your current consumers is just paying for what you would get for free by reinforcing your core value.

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