Sunday, May 24, 2020

Print or Digital: The Trade-Offs Brand Managers Face When Choosing Between Paper and Electronic Coupons

Let’s talk about coupons.

More specifically, manufacturer coupons issued by major brands for consumers to redeem against every-day food and household purchases at grocery and drug stores.

Why, despite the appeal and growth of digital incentives, have traditional paper coupons continued to reign supreme? Is it just a matter of time to change consumer adoption habits, or is there more to the physical paper coupon that accounts for its longevity and continued popularity?

Coupons are a big business. According to Cadent Consulting’s 2020 Marketing Spending Industry Study, CPGs spend nearly $19B on a combination of printed (mostly newspaper distributed free-standing inserts, or FSI), digital and retailer-specific coupons. In 2019, some 267B (yes, that’s billion, with a B!) coupons were issued, according to Inmar’s 2019 Promotions Industry Analysis report, of which 1.74B were redeemed by consumers, helping them realize nearly $3B in savings. Digital coupons, distributed online or via mobile apps, have been steadily gaining popularity – over the 10 years since 2009, digital coupons have grown from 1.5% of all redemptions to 22.9% last year.

Yet, paper coupons, while declining (in large, due to shrinking newspaper circulations), have shown surprising resilience. They account for the vast majority of all coupons distributed to consumers (some 240B of them were issued in 2019), and over 530M were redeemed in stores, making them (still!) the single largest coupon vehicle in terms of redemption volumes. 

It’s inevitable that FSI programming, delivered through newspapers, shared mail and other publications, will continue to decline, and many in the industry have been predicting its “imminent demise” for years. But despite these rumors and speculations that have been circulating for the better part of a decade, paper FSIs still represent over 90% of all coupons distributed to consumers. The resiliency of this product is not just a testament to its consumer appeal, but more importantly, it is due to the fact that no digital promotional product has been able to replicate the unique combination of value elements (both to consumers and to brand managers) delivered by FSI programming. 

A quick exploration of the purpose and realities of coupon promotions reveals why today’s digital coupon, long-heralded as heir-apparent to the FSI, has so far failed to dethrone the long-reigning Sunday-paper coupon insert.

Cost Efficiency
FSI booklets are cooperative, multi-manufacturer, multi-brand vehicles, which sell ad pages at cost per thousand (or CPM) in the range of $3-4. That’s $0.003-$0.004 per full-page coupon published (the most expensive option, as most coupons utilize a fraction of a page). Average redemption rates for FSIs hover around 0.2-0.25%, which means brands pay $0.13-$0.15 per redemption.

Digital coupons, by comparison, are typically sold by the “clip” (when a consumer clicks on the coupon to save it to their digital wallet or loyalty card for future use) and despite having no paper, ink or circulation cost, they generally sell for around $0.09 per clip, which converts to a CPM of $90 per coupon clipped. And since digital redemption rates (percent of clipped digital coupons that were redeemed with a purchase) are around 7%, the cost per digital coupon redeemed ends up being nearly $1.29.

Now, it’s true that digital promotions have many benefits – digital campaigns theoretically allow more precise, one-to-one targeting via digital media (e.g., websites, apps, social and email), generate detailed performance and attribution data traceable down to the target audience or even the individual consumer, and can be turned on and off in real time much more easily than analog programs. But is that value worth 10x the cost to the brand manager? And what about the comparative benefits of physical coupons (see below)?

Universal Reach
FSIs are published nearly every week of the year, save some holiday exceptions, and are sent via direct mail or as newspaper inserts to over 60 million households. The sheer value of getting hundreds of millions of eyeballs on a physical advertisement printed in full-color and delivered to a consumer’s doorstep, is significant, but largely overlooked by marketers and certainly not priced in any meaningful way into the low (and dropping) CPM rates of the FSI.

In addition, thanks to a coupon clearing market structure that has existed and functioned predictably in the industry for decades, paper coupons are universally redeemable at any retailer who accepts coupons (which is the vast majority of them). Retailers work with independent clearing houses, such as Inmar and NCH, to validate and count the physical coupons, and provide the settlement services between the retailer and the CPG brand for the aggregate face value of the coupons redeemed at the retailer’s cash registers.

That market structure, though invisible to consumers, provides them with a major benefit that digital coupons are yet to crack – the convenience of being able to redeem the coupon in whichever store they choose. And for brand managers, it allows them – with a single contract – to activate a large-scale campaign, reaching tens-of-millions of households with both a physical brand-equity message and a promotional discount that can be used anywhere, without having to consult or depend on any particular retailer.

As for digital coupons, they are by and large tied to a retailer’s loyalty program – the consumer clips the coupon to their loyalty ID, and the next time they purchase the promoted product at that retailer, they get the value of the discount (often automatically deducted without having to present the coupon). To make this work, the systems of the activation provider of digital manufacturer coupons (usually a third-party marketing services company, like Inmar or Quotient) have to be integrated with the transaction management and point of sale (POS) systems of the retailer.

Such integration is an expensive, lengthy and potentially disruptive project for any retailer. As a result, there are just a few providers integrated with a handful of retailers, and there is no universal network that allows digitally distributed manufacturer coupons to be redeemed by a consumer at any store of their choosing – the consumer must go to the store whose loyalty program they used to clip the coupon in the first place.

And given the size and footprint of certain large retailers, like Kroger or Safeway/Albertsons, the vast majority of digital coupon redemptions end up at these top chains. This de facto turns what brand managers intended to be a nationally distributed, multi-retailer campaign into a retailer-specific promotion and an extension of the already significant ‘trade dollars’ they invest with these major retailers.

Tactile Engagement
A former client at a large CPG company once remarked that the paper coupon provides the shopper an unavoidable reminder of its value. It’s tangible and must be used and read during the shopping trip. A physical incentive has the ability to influence shopping behavior far more effectively than a paperless digital offer that was clipped some time ago in a shopping app, and likely forgotten thereafter.

According to the 2K19 Valassis Coupon Intelligence Report, more consumers prefer to receive and actually use physical coupons than paperless coupons. In addition, consumers make the vast majority (76% in grocery and 82% at mass merchants) of their brand choices in the store, as evidenced in the widely used POPAI Shopper Engagement Study. In other words, brand loyalty doesn’t really exist, and brands need to constantly retain and grow share during every household purchase cycle.

Electronic coupons distributed over digital media channels suffer from the same viewability, brand safety and potential ‘click farm’ fraud challenges faced by all digital advertisements. And even after clipping a digital coupon, how many consumers use their store app during the shopping trip to consult their digital coupon wallet? When shopping, especially for groceries, most consumers are in ‘utility mode’.

The POPAI study shows that the average grocery trip is between 26-34 minutes. While in the store, consumers are not likely to be scrolling through a list of 75-100 coupons clipped to their app. Digital coupons likely have little influence on the in-store decisions consumers make, especially since to redeem them requires no consumer action at the time of purchase.

Such passive coupon redemption is not what brand managers like to spend their money on, since it simply over-rewards a customer who was already intending to buy that product. Now, concerns over handling paper coupons caused by the COVID-19 pandemic may sway more consumers (and retailers) to favor electronic coupons, but it remains to be seen whether these fears and behaviors will persist in the long term.

Trade Leverage
Coupons have routinely been used by brands, in particular their sales organizations, to incent retailers to buy more cases, advertise their product, and build off-shelf displays in aisle or on endcaps (large end-of-aisle displays). When an FSI is distributed over a single weekend, the marketplace is flooded with 30-50 million coupons and it is often timed in conjunction with a ‘trade deal’ (a product cost reduction offered by the brand to the retailer).

This combination produces a push-pull effect that works well for all parties. The trade deal pushes the product into the retailer’s warehouses and stores, and the coupon (as well as the in-store display the retailer created to coincide with the coupon drop) causes a pull by encouraging impulse purchases, forward buying and new product trials. As FSIs are universally redeemable, this trade leverage impact occurs at the majority of retailers carrying the product, thus generating a multiplier effect for sales volumes.

Digital coupons don’t perform quite the same way. First, unlike the FSI, they are not ‘dropped’ at a particular date, so they do not create the same short-term surge in buying activity (both by consumers and retailers) – instead, the clips and redemptions trickle in over a longer period throughout the life of the promotion.

Second, they are concentrated at large individual chains and don’t have the same multiplier effect across the long tail of retailers. Even a large digital campaign of 3 million coupons redeeming at a higher-than-average rate of 10% might have trade leverage at Kroger and Safeway, where most redemptions would occur, but at the majority of retailers it will have little to no impact on volume.

In the end, the question is not whether digital coupons are better than paper FSIs or the other way around. The question is: how can the proven and tangible benefits paper coupons have long offered consumers, brand managers and retailers be best replicated in digital form. How to combine the tactile realness, the distribution scale and universal acceptance of the paper FSI coupon with the smart targeting, campaign flexibility, and data-rich insights provided by its digital descendants?

One answer is likely to think of the two as complements, rather than as mutually exclusive alternatives. Integrated “digilog” campaigns have proven to drive better performance for brand managers and enhanced customer experiences.

Another likely answer is that the consumer marketing industry, led by the CPGs whose marketing budgets pay for the whole thing, should continue to encourage – and even demand – greater innovation, competition, collaboration and connectivity between marketing service providers, retailers and IT systems integrators. The goal would be to leverage new technologies (like Blockchain, AI, AR, and IoT) so that universal, retailer-agnostic networks and business models can emerge, recreating the benefits of the FSI and the paper coupon clearing model, and combining those with the intelligence and flexibility of digital coupons.

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