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Figure 16-3 Calculating couponing costs already use the brand. For example, General Foods decided to reduce its use of coupons for Maxwell House coffee when research revealed the coupons were being redeemed primarily by current users. Rather than attracting new users, coupons can end up reducing the company's profit margins among consumers who would probably purchase the product anyway.

Other problems with coupons include low redemption rates and high costs. Couponing program expenses include the face value of the coupon redeemed plus costs for production, distribution, and handling of the coupons. Figure 16-3 shows the calculations used to determine the costs of a couponing program using an FSI (freestanding insert) in the Sunday newspaper and a coupon with an average face value of 74 cents. As can be seen from these figures, the cost of a couponing program can be very high. Former Procter & Gamble chairman Durk Jager, who led efforts to rein in the company's use of coupons in the late 90s, has argued that they are extremely inefficient. He contends that it may cost as much as $50 to move a case of goods with coupons that may generate only $10 to $12 in gross profit.30 Marketers should track coupon costs very carefully to ensure their use is economically feasible.

Another problem with coupon promotions is misredemption, or the cashing of a coupon without purchase of the brand. Coupon misredemption or fraud occurs in a number of ways, including:

• Redemption of coupons by consumers for a product or size not specified on the coupon.

• Redemption of coupons by salesclerks in exchange for cash.

• Gathering and redemption of coupons by store managers or owners without the accompanying sale of the product.

• Gathering or printing of coupons by criminals who sell them to unethical merchants, who in turn redeem them.

Estimates of coupon misredemption costs are as high as $500 million.31 Many manufacturers hold firm in their policy to not pay retailers for questionable amounts or suspicious types of coupon submissions. However, some companies are less aggressive, and this affects their profit margins. Marketers must allow a certain percentage for misredemption when estimating the costs of a couponing program. Ways to identify and control coupon misredemption, such as improved coding, are being developed, but it still remains a problem.

Figure 16-3 Calculating couponing costs

Cost per Coupon Redeemed: An Illustration

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