Creating the Optimal Coupon Mix for Personalized Marketing

The first ever coupon is believed to have been distributed in 1888 by Coca-Cola — a ticket for a “free cup of Coke” to help promote the drink. It's estimated that by 1913, one in nine Americans had redeemed at least one of the 8.5 million tickets distributed through mail, magazine inserts, sales representatives and company employees.

Historically, coupons were viewed simply as a mass promotion vehicle to drive more sales of a particular product. In the digital age, customer information provides retailers the opportunity to join forces with suppliers to personalize and optimize coupon distribution in a way that serves a multitude of objectives. For example, personalized coupons can support introduction to categories and products, retention of customer revenue, cross-sell strategies, improvement of brand and private-label recognition, and more.

To achieve these objectives with a reasonable return on investment, utmost attention must be given to the effectiveness of efforts in creating the right mix of personalized coupons.

In a previous blog post, I discussed tactics for coupon personalization for newly acquired customers in fast-moving consumer goods (FMCG) retailing. In this post, I extend the discussion to other coupons that serve the continuous optimized targeting of marketable customers.

Obviously, the effectiveness of these personalization and optimization concepts is highly dependent on having the right bank of coupons in place. This bank of typically hundreds of coupons should fulfill many different customer needs, and at the same time, address the business objectives of the retailer and its suppliers. A limited coupon bank in terms of quantity and variety, even when using the best personalization and optimization technology, will fall short.

It isn’t just about supporting marketing objectives, however. Since maintaining a coupon bank is costly and can potentially be an operational burden, it's crucial to create the right mix of offers using the right methodology. In fact, each coupon requires creative work, maintenance of back-end systems, operational considerations such as avoiding conflicts with other marketing initiatives, alignment with pricing changes, and negotiation and settlement with suppliers.

Addressing Varying Customer Needs With Suitable Coupons

To create a bank that can fulfill a retailer’s multiple and sometimes competing objectives, let’s first map customer needs into four categories: Essentials, Specials, Desires and Exotic. Diagram A provides a rough grouping of products purchased by customers into various categories of a hypermarket with these four categories:

1. Essentials are products that most of the customers buy in high frequency, such as fresh food and fruit.
2. Specials are products that part of the customers buy frequently to satisfy their special needs, such as baby products.
3. Desires are products that most of the customers buy in relatively low frequency to satisfy their desires, such as snacks.
4. Exotics are products that part of the customers buy in relatively low frequency to cover their occasional needs, such as apparel.

Here are the basic principles to select the right products:

• Attractiveness: For the most part, coupons should come from the Essentials, Specials, and Desires categories. Coupons of Exotic categories aren't effective for driving a recurring value proposition and shouldn't be part of the continuous targeting bank. They can, however, be useful when creating ad-hoc marketing initiatives for momentary business needs such as driving sales in a specific period, category or product.
• Reach: Products from Desires, Essentials and Specials that have a high affinity with other products and categories are appropriate for diversifying the basket and enhancing the customer relationship.
• Value: On aggregate, products selected from these distinct categories should represent at least 25 percent of the total category sales transaction. In this way, you ensure sufficient customer base coverage.

Addressing Specific Marketing Objectives

Once the right selection of products has been achieved, personalized targeting will require associating coupons to marketing objectives. This association should benefit the retailer and suppliers, who often fund these coupons. Here are guidelines for the use of coupons to fulfill these objectives in a reversed view of the customer lifecycle:

1. Win back: Coupons in the Specials category are “niche” products that satisfy specific needs such as specialty cuisine, and are unique and differentiating. They go beyond retention and may bring back customers that left.
2. Retention: Products in the Essentials and Specials categories, taking into consideration customers’ affinities to specific brands, are best for retention and fighting basket splitting.
3. Growth: Coupons for products in the Desires category are best for basket growth, since customers can often be convinced to buy them in larger quantities or frequency with the right promotion.
4. Profitability: Coupons for products from the Specials category are the antithesis of Essentials, which are typically best-sellers and exposed to “price wars.” Since Specials carry unique value, their promotion via personalization can contribute to profitability. Many products from the Desires category are also profitable and can be used for this objective.
5. Acquisition: Coupons for products in the Essentials category are best for transforming new customers into repeat customers. See more on this in a previous blog post.

A rich coupon bank that fulfills a broad variety of customer needs and addresses the different business objectives of the retailer is the foundation that enables personalization engines to select the best set of offers for each customer and to optimize the business benefits for both retailers and suppliers. Once created, this coupon bank can be used and then reused in one-off and recurring personalized campaigns, using multiobjective offer personalization and optimization, as described in an earlier blog post.

I hope you found the ideas and thoughts on how to select products for your coupon bank useful. Feel free to share your thoughts with me. Happy couponing!

Dr. Shuki Idan works as an advisor to ciValue, a company that uses automated machine learning and data science to decode consumers’ “Retail DNA” and provide personalized actions to optimize retailers’ and suppliers’ objectives.