By Contributing Editor Anna Murray

Online coupons are not quite mainstream yet. But they are on their way.

Although most divisions of the biggest consumer packaged goods firms, such as Unilever and Procter & Gamble, have yet to test online or emailed coupons, plenty of other marketers from Krispy Kreme to Land O’ Lakes have run successful campaigns with e-coupons.

According to NCH Marketing Services, 496 million coupons were distributed via the Internet in 2002, and we estimate that number will rise above a billion in 2004. (248 billion coupons were distributed offline in 2002, which gives you some idea of how big this could grow.)

Part I of this Special Report includes:

a. The six categories of online coupons
b. Metrics – basic redemption data
c. Fraud – how risky are online coupons?
d. 9 tactics to reduce your risk of fraud
e. Profiles & cost data on 4 leading e-coupon vendors
f. How to calculate your campaign RIO (return on investment)

a. The six categories of online coupons

When someone says "online coupon" what do they mean? Generally they could mean one of six different things:

#1. Register-to-postal-mail:

Starting on the low-tech end, you can go to some manufacturer's sites and register to receive a printed coupon through the mail. Procter & Gamble offers this kind of option on its site.

#2. Offline retailer coupons:

These are also on the low-tech side of things. Retailers, from your corner Pizza place to Target, put coupons up on a web site or deliver them through email. There is virtually no security on these coupons -- you can see them on screen and print them from your screen.

The key here is that the brick-and-mortar establishment has issued the coupon. The reason there is virtually no security, is that they really don't care if you print 10. If you get $1.00 of each time you come in to buy a pizza, the retailer is happy for you to come in 10 times and order 10 pizzas.

There is no coupon clearing house, and no 3rd party who is on the hook for the value of these coupons.

#3. Redeemable Codes:

This sort of online coupon is simply a code that you use when you go to an online retailer to make a purchase. You enter the code in your shopping cart to receive a discount.

These codes may be given out by the retailer, by a third party such as a surveying firm as an incentive, or even as gift certificates by consumers themselves.

#4. Subsequent-Purchase Electronic Coupon

Confusingly, there is actually a difference between the terms "online coupon" and "electronic coupon." When people say "electronic coupon" what they mean is the Catalina-style red-bordered coupon that you get when you check out of a brick and mortar grocery store.

If you shop in a store that has the Catalina system and buy Kleenex, for example, the printer may spit out a coupon for 50 cents off Puff's.

You can also go online at home and print out a page with a bar code called a "WebBuck." This is NOT a coupon -- yet. You bring the printed page into the store and buy the product associated with it. On that purchase, you do NOT receive any discount. But, the Catalina system will spit out coupon with the stated value for your NEXT purchase of the item.

5. Print-at-Home Coupons:

With the term "print at home coupon," we have finally arrived at what 99% of people mean when they say "online coupon." It is also where 99% of the angst and debate comes in.

A print-at-home coupon works this way: You go to a site -- it could be a manufacturer's site or a savings-type portal site -- and you register. As part of the registration process, you download a little piece of software.

You select the offer you would like and click, "print my coupon." Then the software you have downloaded becomes active. It sends the coupon to your printer and -- here's the key -- you never see it on your screen. The coupon has your name on it, a unique bar code, and is trackable back to you.

You take that coupon to your store and realize the value of it when you purchase the specified product.

#6. Frequent Shopper Card Coupon

Only two retailers, Giant Eagle and Kroger, currently offer this type of "coupon." Not in widespread use, it is generally regarded as the promise of the future.

Here's how it works: at a web site, you register your frequent shopper card or the credit card you use to do your grocery shopping. You select which offers you would like to avail yourself of. Then, those offers are automatically "loaded" onto your card. Clearly, your card has not been touched. But the data on your requested offer has been transmitted to the participating retailers. Then, when your card is scanned at checkout, the discount is applied to your purchase.

Since #5 -- print-at-home coupons -- is what people generally mean by the term "online coupons," this Special Report will discuss that strategy in the greatest detail. Unless otherwise noted, "online coupons" means print-at-home coupons.

b. Metrics – basic redemption data

How do online coupons compare to the more traditional vehicles?

When we talk about traditional coupons, mostly we mean the coupons that you get in your Sunday paper. Also referred to as free-standing inserts or FSIs, these traditional coupons account for the vast majority, 84%, of all coupons used by shoppers in the United States.

For grocery products, print-at-home coupons have a relatively high redemption rates. According to NCH, FSI-type coupons are redeemed at a rate of 1.2%.

No single average number exists yet for online coupons. coolsavings.com.com reports redemption rates in the 10-20% range. SmartSource reports a range of 4-22%.

According to Smart Source, the high redemption rates occur on products with strong brand equity and a high frequency of use.

Most agree that online coupons, because they are sought out by consumers and not received passively in the Sunday paper, have a significantly higher redemption rate than traditional coupons.

Allan Cummings, Head of Marketing for British eretailer I Want One of Those Ltd, reports that online codes sent through email have a much higher response rate than coupons sent through traditional mail. He also says that, unlike postal mailed coupons, people use them immediately, or not at all.

To round-up:
FSI- 1.2%
Online- 5-20%
In-Store flyer--4-8%
Inpack/On pack--5-22%

c. Fraud -- how risky are online coupons?

Coupon "misredemption" is an industry euphemism for coupon fraud.

It includes the unintentional activities of retailers and consumers, such as submitting a coupon for the wrong product. But most marketers are concerned about outright fraud -- when retailers, or people posing as retailers, set up "clipping lines" or duplicate coupons that are then submitted to the manufacturer for their face value having never been used by a consumer to purchase a product.

In data collected on 12 types of coupons, Internet coupons ranked near the bottom of the list -- number nine, tied with on-pack coupons -- in terms of misredemption.

In other words, eight types of coupons were more likely to be fraudulently redeemed. Only two types of coupons, electronic checkout coupons and Newspaper Run of Press, were "safer."

Ranking of coupons by incidence of fraud:

1. FSI
2. Instant Redeemable
3. In-ad
4. Electronic Shelf
5. Shelf Pad
6. Handout
7. Direct Mail
8. In-pack
9. Internet & On-Pack
10. Newspaper Run of Press
11. Electronic Checkout

This calculation was adjusted for the volume of coupons redeemed. The data crunchers at coupon clearinghouse CMS, accounted for the difference in coupon volume of each of the vehicles by indexing the percent of coupons misredeemed to the percent of coupons by overall distribution method. Using a base of 100, the relative index for FSIs was 140, with the next most misredeemed vehicle, (instant redeemable) at 56, and Internet coupons at 20.
(Advantage Update, CMS, Q1 2002)

So why are marketers and retailers so scared of Internet coupon fraud?

There have been several well-publicized and hotly discussed incidents. In fact, just 6 months ago, Kroger and Publix in the Atlanta area said that they would no longer accept computer-generated coupons.
(Atlanta Journal Constitution, 8/16/03)

"The irony is that these weren't Internet coupons," says Matt Moog, CEO coolsavings.com.com. "Some wise guy manipulated coupons from an FSI into free product coupons, then scanned them in and auctioned them on eBay."

“People have been calling them ‘internet coupons,’” says Jeff Weitzman, President and COO of Coupons, Inc. “But if someone took and FSI and made a bunch of copies on a color printer, put them in envelopes, stamped them and mailed them to you, would you call them direct-mail?”

The Atlanta incident prompted a new policy at eBay, which, as of January 2004, no longer permits coupons to be auctioned online unless they are collectible coupons that clearly may not be redeemed.

Most people interviewed for this article agreed -- the concerns surrounding online coupons are so high that, even though the incidence of fraud is low, one or two cases that hit the media have a disproportionate influence on the perceptions of retailers and marketers.

d. 9 tactics to reduce your risk of fraud

Though patent suits may rage (and they do) between the major providers or online coupon technology, the fraud-minimizing principles underlying the technology are essentially the same vendor to vendor.

Tactic #1. Registration
If you want to access online print-at-home coupons, you will have to register, either at a manufacturer’s site or at a savings/portal site. You will need to give your name, address, email -- the works. Some sites will also ask you for demographic information and purchasing behavior. The goal is to be able to connect the coupon, through its lifecycle, to YOU.

Tactic #2. Extra piece of software
This is also a requirement. You will have to download and install (usually in one combined step) a small application. This application governs the printing of the coupon.

Tactic #3. No on-screen Coupon
After you have registered and installed, you will get to print your coupon. Once you say, "go," several separate files are sent to the printer. They are assembled at the printer there and the printer spits out a coupon. You never see the coupon on your screen. And, therefore, have less opportunity to capture and manipulate it. You also can't print-screen and print out multiple copies.

Tactic #4. No repeat prints
If you try to print the coupon more than once from the site, you will be greeted with a message that thanks you for your interest, but reminds you that you have already printed the coupon your allotted number of times.

Tactic #5. Trackable back to individual consumer
The coupon will have your name on it, often expresses as "household" or "family" for privacy reasons. For example, the coupon would read, "The Smith Household." Each coupon has a pin number that is linked to you as well as a unique bar code.

So, if you went to the copier machine and made multiple copies and tried to redeem the coupon, your fraud would be flagged when those coupons showed up at a coupon clearinghouse. Then, the manufacturer or online coupon technology provider might send you a nasty warning letter.

Says Kate Riddell online marketing manager for ConAgra Foods, "No one wants to go to jail over $10." ConAgra has even worked with their coupon vendor to enlarge the consumer household name on the coupon to further discourage fraud.

In addition to these technical features, we recommend the following low-tech best practices:

Tactic #6. Make sure there is a clear, large product shot and logo. Be very specific as to what product brand, product, sizes and flavors the coupon is valid for.

Tactic #7. The coupon should have a hard-to-reproduce watermark in the background.

Tactic #8. Include an expiration date that is easy to spot.

Tactic #9. Avoid buy-one-get-one-free (BOGOS) offers, free-product coupons and high-value coupons. Save these for a medium over which you have more control, like direct mail.

e. Profiles & cost data on 4 leading e-coupon vendors

If you want to distribute online coupons, there are two main ways to go about it...

-> License the technology:
Several companies will license you their technology so that you can print and distribute coupons online from your own site. You pay a fee for the ASP-type solution, and a per-print cost, and then you can allow consumers to come to your site, select offers and get coupons.

-> or use a coupon portal Web site:
In this model, you work with a "savings" portal or network of sites that aggregates an audience of registered users. You work with the portal/network to develop an offer. They then show your offer to their users who print your coupons.

Here's some basic info on the four best-known vendors in the online coupon vendor space. They're listed in alpha order. We have listed costs, however, as each vendor reminded us, every campaign is different. So, these costs are meant to give guidance, and are not “ratecards.”

-> coolsavings.com.com:

Coolsavings.com appears to be the largest branded third-party distributor of coupons online (vs. coupons offered directly by brands themselves.) In 2000, the NPD group reported that Coolsavings.com accounted for 51% of all online coupons distributed. Now, Matt Moog, Coolsavings.com CEO estimates that Coolsavings.com has "60% of the entire market of printable coupons.

Coolsavings.com is most commonly known a coupon portal site, with 12 million active users. The company also provides licensed-technology option.

To run an online coupon program to Coolsavings.com members (portal option) will cost a $1500 set-up fee and then 7-10 cents per printed coupon.

A “reasonably sized” program in which a customer licenses the technology would cost “less than $10,000,” according to Mitch Tuch, vice president for consumer packaged goods at Coolsavings.com.

In February, Coolsavings.com acquired Targeted Marketing Services business of Alliance Data Systems. TMS is the company behind the frequent-shopper-card couponing approach of Giant Eagle and Kroger.

-> Coupons, Inc.

Coupons, Inc. provides a licensed technology that allows you to offer coupons at your own site or via email. They do not distribute or promote coupons to consumers directly. Jeff Weitzman, President and COO explains, “We’re a marketing technology service provider.”

The Company says its technology was used to distribute "more than 90% of the grocery, health, beauty, and pharmaceutical consumer-printed coupons in 2003."

According to Weitzman, “A typical coupon campaign with a typical number of prints would cost under $7500.”

-> E-centives

E-centives, Inc. provides a suite of online marketing products such as email marketing, data warehousing, sweepstakes and online coupons. In 2001, when the company went public, it acquired BrightStreet, a vendor of online couponing technology.

CEO Kamran Amjadi says licensing the technology for a “small” campaign could be “as low as $2500.” This sort of deployment would likely involve one coupon distributed for a limited period of time.

“If you wanted more of a ‘program,’” says Amjadi, a cost might run $11,000. This could be a single coupon but distributed over the course of a year. “Of course costs depend on setup, customization, escalation and de-escalation and the number of variables.”

E-centives is also piloting portal-type programs with several manufactures. “We are doing what we call ‘digital FSIs’ with partners such as AOL,” Amjadi says. While these programs are only in the piloting stage, he says costs are running 4 cents per printed coupon.

-> SmartSource

SmartSource, like Coolsavings.com, provides you with a ready-made audience for your coupons. According to Heather Harde, SVP Strategy & Development, “We work through a network model. We provide content not only on SmartSource.com, but also on an affiliate network of 77 other sites, including Women’s Day, BHG, and American Baby.”

Coupons, Inc. provides the couponing technology to SmartSource.
A program on SmartSource for 75,000 printed coupons would cost a manufacturer $7,520.


f. How to calculate your campaign RIO (return on investment)

“An FSI in the Sunday paper moves 400,000 boxes,” says Kamran Amjadi, E-centives CEO. “That’s significant enough to be important to the brand manager. It’s all about market share.
The major problem with traditional coupons, however, is that I have no idea who I sent this stuff to. I don’t know who these people are. I don’t know the dynamics inside the black box.”

Amjadi asserts that as online coupon use grows, the strategy will still be about market share. “But it will be more about specific variables you want to move such as trial, turning non-category users into category users, increasing frequency of purchase, using loyalty on one product to cross-sell another.”

“If I’m a brand manager,” says Michael Bragg, former Director & Founder of Online Strategies & Services at Con Agra and current VP Precision & Direct-to-consumer marketing at Fair Isaac, “I can bank on the FSI numbers. If I spend this much on an FSI, I get x amount of lift.”

“An FSI gets a 1.2% rate of return. That’s 960,000 people on a 48-million FSI drop,” Bragg says. An average yearly FSI budget for 20 brands might be “around $28 million. The question is, if I built a database of consumers that buy product, how many consumers do I need to move a similar amount of product?"

Using a 20% redemption rate for online coupons (online coupons distributed through a manufacturer’s site have the highest rates of redemption), "That means the bogey on the database is 5 million. I need 5 million names in my consumer database to gain a similar lift as with an FSI," Bragg says. "But," he adds, "At the same time I will be saving money. To do online coupons four times a year will cost me $4-5 million. I'm saving 20-plus million dollars."

“In the world of couponing,” says Coupons, Inc.’s Weitzman, “The FSI is like TV. In the short term, it’s going to keep its 85% share. It’s the remaining 15% that everyone is going to have to look at very carefully. After FSIs, why would you use another method that is more expensive than online coupons and where you get no data or analytics?

Coming next week: in Part II of this special report, you’ll get three real-life Case Histories of online couponing campaigns that worked for Land O’Lakes, Act II, and Krispy Kreme.