• Coupons, such as those distributed in the Sunday newspaper, can be effective for stimulating sales. However, they are very expensive and redemption rates are usually low. The cost of running a coupon program includes redemption costs (the face value of the coupon multiplied by the number of coupons redeemed) plus costs of production, distribution and administration. An unknown number (some estimate 20%) of redemptions are not accompanied by a valid product purchase, meaning that sometimes the marketer pays for the promotion even if the intended sale doesn't happen.

  One way to estimate these costs is illustrated below:

  1. Distribution cost (cost of getting the coupon to the customer)

  55,000,000 circulation (reach) x $6.25 per thousand = $343,750

  2. Redemption rate of 1.5% (how many coupons will be redeemed)

  .015 x 55,000,000 = 825,000

  3. Redemption costs (marketer has to pay for the discount that the customer receives)

  825,000 redemptions x 1.00 face value of coupon = $825,000

  4. Retailer handling cost & processor fees (marketer has to pay retailer and distributors for processing coupons)

  825,000 redemptions x $.10 = $82,500

  5. Creative costs (payment to artist/designer who creates the coupon) $1,500

  6. Total program cost

  Total of items 1 + 3 + 4 + 5 = $1,252,750

  7. Actual product units sold on redemption (how many products were sold on promotion; misredemption estimated at 20%)

  825,000 x 80% = 660,000

  8. Cost per product moved (promotion cost associated with each product sold)

  Program cost (6) divided by number of products sold (7) = $1.90

  Adapted from: Belch & Belch (2018), Advertising and Promotion.

  If this scenario were presented as a word problem, it might appear as follows:

  Gildas yogurt placed a $1.00-off coupon in a free-standing insert circulated in the Sunday HomeLife magazine. The insertion is expected to reach 55 million people at a cost of $6.25 per thousand. Gilda's paid $1,500 to get an agency to design and lay out the insert. Gildas promotional manager estimates that 1.5 percent of consumers who receive the coupon will redeem it, but that 20 percent of those redemptions will not be accompanied by a valid product purchase. Gildas must pay 10 cents per redemption in processing fees to retailers and redemption centers.

  What is the distribution cost for this promotion? (1)

  What is the redemption cost for this promotion? (3)

  What is the processing cost for this promotion? (4)

  What is the creative cost for this promotion? (5)

  What is the total cost of this coupon promotion? (6)

  How many product units will be sold through the promotion? (7)

  What is the promotional cost per product unit sold? (8)