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WARNING: Do not use Coupons unless...

Discussion in 'Grumble Archive pre 2004 Topics' started by Alex, Sep 10, 1999.

  1. Alex

    Alex Guest

    you know what you're doing!

    I saw the following comment posted by another framer: "As much as some people may hate it, couponing is the best way beyond a doubt to get people thru the door. I am talking about saturation-not one
    10000 home mailing 2 times a year-but a minimum of 50000 a month on a monthly basis (val pak type)."

    Let's begin to discuss this by asking some very critical and important questions:

    Do you even know what ELASTICITY OF DEMAND is? And do you understand how it works? And what it can do to your profits?

    If you can't answer these simple but vital questions, then you have no business shot-gunning your local neighborhoods with Val Pak coupons or any other type of discount coupon(s).

    Okay, suppose you are the owner of a frame shop. You're considering raising the price of your framing materials by, let's say, 5%. How will your customers react? You know, that according to the law of demand, when a good's price rises, quantity demanded generally falls. But what you really need to know is the extent to which the quantity demanded of your delux frame job will fall if you boost the price by 5%.

    To forcast the effect of price changes on your revenue, you need a measure of buyer sensitivity. This is called the elasticity of demand. Price elasticity of demand is a number representing the percentage change in quantity demanded resulting from each 1% change in the price of a good. This number is then used to gauge the sensitivity of quantity demanded of a good to percentage changes in the price of that good. Price elasticity of demand is a measure of the responsiveness of quantity demanded to price changes along a given demand curve. Price elasticity is calculated by dividing the percentage change in quantity demanded of a good by the percentage change in price that caused it, all other things being equal.

    Price elasticity of demand = % change in quantity demanded divided by % change in price.

    In short, don't let the calculations confuse you. If you can read a tape measure you can calculate price elasticity of demand. You might be asking, "But how do I use it? What is it for? How can it help me?" Simple! You use it to help you make market forcasts!

    Here's a couple of examples: Say you raised prices by 1% and the resulting decline in sales was 2%. The price elasticity of demand would be: -2% divided by 1% which = -2.

    The price elasticity of demand is a number without units of measurement because it's obtained by dividing two percentage numbers. Also, it's a negative number. This is because an increase in price will generally result in a decrease in quantity demanded, other things being equal. Similarly, if the price you charge decreases (because of couponing discounts, or other reasons), the percentage change in price would be negative and the percentage change in quantity would be positive. Another example: suppose you decrease prices by 2% and the increase in sales quantity goes up 2%. The price elasticity of demand forthat price decline would be 2% divided by -2% which = -1.

    Now you can calculate price elasticity of demand for your business. Let's say you've done some calculations, and you discovered that your elasticity of demand is -2. Now you can use the concept of elasticity of demand to make predictions of changes in quantity demanded in response to price changes. For example, let's say that last year you sold 10,000 frames. And this year you know that the price you charge for each frame is going to go up 10%. You know that the law of demand implies that, other things being equal, you'll sell fewer frames this year; but the law of demand doesn't give you any idea of how many fewer you'll sell. Now you can see the importance of the concept of price elasticity of demand.

    Don't get lost here. It's not that hard to follow. Because your own elasticity is -2 (hypothetical number--remember, you're going to calculate your own number). Because you know the percentage change in price ( 10% ), and the elasticity of demand for your shop(product) is -2, you can calculate the percentage change in quantity demanded:

    % change in quantity demanded divided by 10% will = -2. Therefore, % change in quantity demanded will = -20%. You will expect a 20% reduction in sales as a result of a 10% increase in price. Which means you will only sell 8,000 frames this year instead of 10,000. Now you have something solid you can put your teeth into and feel good or bad about making a decision to either raise prices or not. And the best part is, you can do this on paper first, without even having to try it for real! See what you've been missing!

    Now do it calculating a 20% or 50% OFF COUPON and see what will happen to you! You will be absolutely SHOCKED! Cash flow may be wonderful, but watch what happens to your Cost of Goods! And if you're one of those framers who already has a COG's at 35-50%, you're gona get killed! You may wake up and decide to never coupon again! So many framers use coupon discounts to try and drive sales, and they don't realize that they are killing the entire industry one framer at a time. It's no wonder that picture framing has become just another commodity.

    Remember, you can't cheat the calculations by raising prices so you can offer a discount. All things must be equal. So the numbers have to stay the same going into it in order to get any valuable (calculations)information out of it. Once you intelligently know what your own elasticity of demand is you will be forever grateful you finally did it the right way.

    Forget the shotgun approach.

    Good luck.
     
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  2. JPete

    JPete <span style="color: red"><b><i>Charter Member</i><

    Thanks for confirming what I always contributed to my common sense. I suppose a little bit of economics rubbed off way back when. [​IMG]
     
  3. jframe

    jframe <span style="color: red"><b><i>Charter Member</i><

    Another good topic to review!
     
  4. accent

    accent True Grumbler

    Good thread to bring back. While I agree that couponing does cut into your bottom line, it does bring in new people that you have not seen before. We keep an accurate count of new timers that these campaigns attract. There is almost always a large proportion of these returns that find us for the first time. This is a component that should be entered into when using this type of promotion. Accent
     
  5. jframe

    jframe <span style="color: red"><b><i>Charter Member</i><

    Actually, you could do a nice dignified direct mail piece to a few select individuals and get more productive long term results. If you don't want to buy a list, you can do a search on one of the internet white pages that list evrybody on a particular street. Even in an area withs 100's of thousands of people, it's not a huge chore because you'll probably only target certain neighborhoods. You could combine it with a holiday open house, or art opening.

    Coupon sales people act like they are doing little ole you such a big favor. Meanwhile, you keep paying and paying and paying, finally ending up with a new customer who only wants to do couponing.
     
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