When it comes to dynamic price optimization, the three crucial KPIs are sales, profit and purchase frequency. In pricing theory, it is said that in principle, any two of this KPIs can be raised together, but never all three. If you look at a single item, this might be true. However, if you look at a retailer’s entire assortment I can disagree in good conscience! Because that is exactly what dynamic price optimization can achieve by using AI technologies. With visibility into a retailer’s entire assortment, individual product prices can be adjusted with the help of AI in such a way that sales, customer purchase frequency AND profit are increased at the same time. A holistic strategy makes all the difference.
An effective instrument to meet sales, profit and purchase frequency KPIs is couponing. Coupons can be used to further drive customer loyalty and purchase frequency. By means of vouchers, attractive discounts on certain products or product groups can encourage purchases. The success of coupons depends on a few factors, including:
- Are discounts on coupons distributed en masse (“one size fits all” approach), or tailored individually for each customer?
- Do the coupons already contain product recommendations that encourage customers to buy? (and here, too: Are they general or individually tailored)?
- Is the coupon offer designed in such a way that it does not cannibalize profit margins?
With coupons, it’s difficult to name a general best practice approach. It depends on a retailers’ vertical, how well coupons are accepted by customers and to what extent these may be at the expense of profits. In the grocery or FMCG retailing sector, for example, retailers using coupons can operate quite differently as in the fashion, DIY or consumer electronics sectors.
When weekly grocery shopping for the family, it is quite likely that the shopping basket will be full – regardless if a coupon has been offered. This means that, from a global perspective, profits are not necessarily at risk. In the grocery retail and FMCG environment, the most important purpose of a coupon is to drive traffic into stores and drive loyalty so that shoppers do not buy from a competitor. Here coupons make a valuable contribution: frequency increases of 15-25% are not uncommon. AI can support this process and minimize manual effort by automatically calculating meaningful discount values per customer and can provide appropriate product recommendations that attract the customers’ interest.
In the fashion, DIY or consumer electronics sectors, coupons are also an effective marketing instrument if they meet certain requirements. This is because in these sectors it is quite possible that customers will only buy the product shown on their coupon – no additional products – which can have a strong negative impact on profits. Therefore, it is particularly important to design coupons in such a way as to protect margins, which can be done by bundling.
How do you do this? You use cross-price elasticities and show not only a discount value on your coupons but also a product combination on which you grant the discount – a so-called bundle. A bundled combination contains one high-frequency product and one high-contribution margin product. For you as a retailer, this creates a special added value, because the bundle generates both purchase frequency and profit. Powerful AI algorithms provide support in determining the right discount value and calculating the right (cross-price elastic) products per customer.
Regardless of choosing to offer a coupon or a bundle, both options should be thoroughly planned so that the expenses are amortized promptly. As a general rule, coupons are used and redeemed more frequently the more they are individually tailored to the shopper. Experience shows that coupons with individually controlled discount values and individually generated product recommendations are most effective – if only because they have the necessary relevance to be noticed by the customer at all. If you want to buy a new dress or a new television set, you are much more receptive to concrete offers for such products than you are to a general 10% discount coupon.
As part of a holistic dynamic pricing strategy, coupons are of course just one of many tools you can use to optimize the most important KPIs – sales, profit and frequency. We would be happy to discuss with you what measures you can take to achieve a sustainable increase in your business figures. Just contact me!