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Part I – Coupon Books

Zones

One advantage to coupon books, I’ll admit from the start, is more control over volume. Unlike other media outlets like network TV ad or newspaper which cover both a vast geographical region and, subsequently, cover a larger volume of prospective customers, coupon books (& other direct mail options) offer ‘advertising by zone’–offering an opportunity to advertise by demographic and geographical region & and an opportunity to split A/B test.

Here in Orlando, FL, a full-run in our local newspaper means getting about 500-600k copies of your message put on paper. Comparatively, a local coupon book that runs in Central Florida breaks the same region down into 30 zones, and each of these zones (able to be purchased individually) typically cover 13k-19k households.

What does this mean for the advertiser?

Smaller Budget, But Higher Cost/Impression

Sure your lawyer can buy up every billboard on your way to work, but if you’re a small boutique or restaurant in a strip center, shelling out $1k on advertising can cut out a sizable chunk of your margin. Hitting a small, close geographical region (eg. “only the East side of the railroad tracks”) may weed out households that have an otherwise lower chance of conversion.

Small advertising in print media, however, doesn’t come without a cost. “Buying in bulk” pays well when talking advertising. Say you run a package deal to direct mail a full-color coupon in a booklet 3 consecutive months (again, frequency of 3) that targets one zone for about 15,000 households/month. For this zone, you’re going to pay a CPM (cost per thousand households) close to $25. Let’s say, instead though, you cut a deal and get the zone for a clean $350/month.

Compare this against a package that covers 20 zones for 300,000 household. You might be get this package at $15/mil.

The Math

3 Zones
($350) / (15,000 households) = 2.3¢/impression

20 Zones
($4,500) / (300,000 households) = 1.5¢/impression

Hold on a second. “I can get my same coupon printed in the local paper for 0.6¢/impression, why should I spend the ‘extra’ on a coupon book?”

Good question.

Target Customers Geographical

To that question, ‘Waste’ is the answer.

When I take my girlfriend out for sushi, I usually don’t make an unnecessarily long trip across town. That’s because there are plenty of good options within a comfortable driving distance. There are some products out there that consumers will see a need to drive for–but in a large and competitive suburban or metropolitan area, sushi won’t be one of them. So, I go to the same restaurant I always go to. Let’s call it our “local favorite”.

The goal here is to cut down on impressions that have lower value. By lower value, I mean lower chance for conversion. In this case, conversions and “distance from sushi shop” are negatively correlated, so who cares if I’m paying half the cost/impression (ie. 0.6¢/impression through newspaper) for someone 25 miles away from my sushi shop if the cost per conversion is 4x (also expressed: ‘chance for conversion is 1/4th‘) that of the household <5 miles from shop.

Bucket Testing

Just because something is difficult & time consuming to measure doesn’t mean it isn’t worth measuring. Conversely, it likely means that it is worth measuring because your competition likely isn’t.

Zone Testing

All things held constant. Send your direct mail coupons to differing zones, at different times, over a statistically significant amount of time (or until you’ve received a statistically significant amount of conversion). Record your results. Cut out waste.

Content Testing

After you’ve found the best zones, send your direct mail coupons to the same zones over and over again with differing content. Ad #1 shows a cut-out coupon, ad #2 displays a QR code, ad #3 advertises “50% Off!”, ad #4 offers a promotional product at an attractive price point. Record your results over a statistically significant amount of time. Record your results. Cut our waste.

When Direct Coupons Work

Another important take away from coupon codes is why they work especially well for low-ticket, but high volume business.

  • Low-ticket items, like sushi, typically work off of higher margin as a percentage than, say, new cars. In the restaurant business, raw cost of food usually hovers around 20-25% of consumer purchase price. Similarly, that Bud Light you purchase in the bars for $4.50 + tip originally cost the bar only $0.50 wholesale.
  • For this reason, restaurant coupons can generally promote more ‘compelling offers’. “50% off any sushi roll” or “Free desert with any entrée” doesn’t mean the company is necessarily taking a hit.

  • Here’s the whipped cream on top: Do you remember that “local favorite” sushi shop I always take my girl to? That restaurant I instinctively think of, at the top of mind, anytime I want to each sushi? That place I never deviate from?

What chance for my patronage do you think another sushi shop has if I have no trigger to change my habits?

Better question: what would it be worth, in dollars, to a new sushi restaurant to have me, a new customer, try them out? Maybe then I’d find a new local favorite. Maybe even my repeat business will more than pay for the “Free Edemame” coupon they dangled so attractively from my mailbox.

Let’s talk numbers.

Theory

Coupon

Let’s go with example #1, using a single zone, direct mail Coupon Book for $350/month at a reach of ~15,000 households.

The Math

Let’s assume, for theory’s sake (this is something that a good business should already be measuring and recording), that:

  1. Average ticket for Dine-in is $15
  2. Average COGS is 20%
  3. Half of first time patrons will visit again
  4. Half of second time patrons will visit again
  5. And 1/3rd of third-time patrons will visit 2 more times
  6. No initial visitors will patron indefinitely or more than 5 times

This tells us that 10 first-time patrons will ultimately generate 18.3 total purchases (I’d like to think this is fairly conservative for any restaurant that puts any effort into the taste of their food, the quality of their services, and the attractiveness of their atmosphere).

At 20% COGS, $350 cost-of-advertising is paid for within $437.50 of revenue.

$437.50 of revenue, at an $15 average ticket, is generated by total 29.2 visits.

29.2 visits is generated by 15.95 unique patrons.

Will then 15,000 coupon impressions generate the 15.95 unique patrons needed to break even?

How does this compare to PPC advertising?

Let’s say now, on the other hand, you spent that same $350 in advertising on Google Adwords and Yahoo! + Bing’s Adcenter. You’re bidding on keywords like “sushi in [insert city]” and on keywords like “[insert city] sushi restaurants”.

These people are laser targeted and are actively looking for local sushi spots. How many of them can you put your name in front of?

The Math

How many sushi shops are in your area, and how attractive are their websites? If there are locally 5 competitors & your website is as at least equally conversion optimized (“attractive”, let’s call it) as theirs are–then for every 100 potential consumers searching online for sushi shops, 20 may decide to eat something besides sushi and the remaining 80 should, theoretically, equally divide up among the competitors, leaving you 16 new unique patrons.

From the previous example, 16 unique patrons generate 29.33 visits. 29.33 visits generate $439 in revenue, and profit dollars should then be around $352.

Not bad.

How much did those 16 patrons make you less cost of advertising?

Let’s say all 100 internet surfers visited your website through Pay-Per-Click advertising. You probably paid around $0.80/click in a medium competitive market.

($352 profit dollars) – (100 visitors)*($0.80) =

$272

Not bad at all.

How much then would you have been willing to pay per click?

($352 profit dollars) – (100 visitors)*($X/click) = 0

As much as $3.52/click, it would seem.

Part II – Daily Deals

Daily Deal websites like Groupon offer great exposure to new businesses at virtually no up-front costs. Click here to read more.