You Asked: Who is Losing Money on Coupons?

by Beth Montgomery on December 8, 2010 · 12 comments

in Coupons & Rebates, Tips & Basics

How Coupons Work

  • Are manufacturers or stores losing money through coupons?
  • Is all of this too good to be true and soon they’ll stop handing out coupons and offering such great deals?
  • Are you worried about hurting stores and manufacturers by using coupons?
  • Someone has to be losing money on this, don’t they?

I get asked this a lot in one form or another.   In fact, my own husband often asks when I come home from shopping, “Don’t you worry that someday they’ll figure out you’re getting stuff for free and stop you?”

My answer, “Umm… no.   Not really.”

So, why don’t I worry?   Well, I was in marketing before I became a stay-at-home mom, so I understand how things work behind the scene.   And, I know stores and manufacturers wouldn’t do it if it wasn’t profitable.

First coupons have been around since 1894 and usages fluctuates up and down each year.   In 1975, an average of 65% of households used coupons in some fashion, so by now it’s a well thought out process by most big-name companies.   There’s a reason you always see big brands like P&G and General Mills releasing coupons and even their own inserts.   They’ve realized it’s a money maker and great advertising.

While coupon usage is up and extreme couponing has become popular, many stores and manufacturers are hopping on board. For them, it’s promote brand awareness.   Even if consumers pass the coupon by, they still see the product in the ad.

Fictional Example

Let’s say a company wants to promote it’s new razor.

Note: Keep in mind, I completely made these prices up just for an example!   I inflated coupon usage to make it more visible.

What Happens Manufacturer Profit/Loss Store Profit/Loss
1.   The company manufacturers 500 of the new razors for $1 each. -$500
2.   The grocery store buys agrees to buy those 500 razors for $4 each. +$2000 -$2000
3.   The grocery store sells 100 of those razors at $9.99. +$999
4.   As part of a marketing campaign, the manufacturer negotiates with the store for a promotion and pays the store for $100 for advertising. -$100 +$100
5.   As part of the promotion,   The store releases a $3 off   store coupon and has a sale on the razors marking them down to $7.   At the same time the manufacturers release a $4/1 coupon in the newspaper inserts.

  • 25 razors on sell that week on sale at $7
  • 25 razors sell that week on sale with a store coupon at $4
  • 25 razors sell that week on sale with a manufacturer coupon at $3
  • 25 razors sell that week on sale with a store and manufacturer coupon and get the razor FREE!!!
+$350
6.   In the next few weeks, more razors are purchased at full price with the coupons.

  • 75 razors sell at full price at $9.99
  • 75 razors sell at full price with a store coupon at $6.99
  • 75 razors sell at full price with a manufacturer coupon at $5.99
  • 75 razors sell at full price with both a store and manufacturer coupon at $2.99
+$1,947
7. The store gathers up the 200 manufacturer coupons monthly and is reimbursed by the manufacturer the face value plus $0.08 per coupon shipping and handling.   The store eats the cost of the store coupons, but remember, they were already paid by the manufacturer for the promotion. -$816 +$816
-$600
Final Profit $584 $1,180
Now, imagine that happening in 200,000 grocery stores across the U.S… $116,800,000 $236,000,000

Now, in all actuality, the percent of coupons actually redeemed is lower, so really you’d see a lot less coupons and a lot more profit.   Plus, we haven’t factored in those who bought refill blades to go with their new razor.   And, of course, I’m leaving out a lot of the logistics, like paying employees, the company who sorts all of those coupons and the mailing for them, and all those extra costs.   But, you get the picture.

So… now who lost money by me and you picking up a FREE razor?   I’d say no one.

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{ 11 comments }

1 Rene @ Budget Saving Mom December 8, 2010 at 9:51 PM

Love the chart! That was quite an informative post. (-:

2 Beth December 8, 2010 at 9:54 PM

LOL, I may have a chart and spreadsheet addiction. I’m not admitting anything… I’m just saying that I *might* :)

3 Sarah K. @ The Pajama Chef December 9, 2010 at 9:50 AM

i’m going to email this to my husband b/c he always asks me the same thing! :)

4 Beth December 18, 2010 at 12:47 AM

Did he appreciate it, Sarah? My husband laughed and said, “Yeah, I guess that makes sense.”

5 Sarah K. @ The Pajama Chef December 22, 2010 at 12:08 PM

yes he did :)

6 Lolli @ Better in Bulk December 9, 2010 at 10:29 AM

Thank you so much for this! While this was not a question troubling my mind, I had wondered how it worked, and your example cleared it up completely.

7 Beth December 18, 2010 at 12:48 AM

I’m glad, Lolli! It took me a while to figure it out too, but since it’s been going on for a LONG time, I knew they couldn’t really be losing money when I thought about it.

8 april yedinak December 18, 2010 at 10:08 AM

I love the chart. I don’t have a very mathematical mind and it helped to see things that way. I am sad to say that I used to hop around to different stores and score tons of nearly free or free items in the past, but now I live in a very small town without a car. I like to think that the savings in transportation (and green living ‘brownie’ points) make up for the loss of my freebies. I still use coupons, but where I used to regularly leave a store with $400 worth of groceries for $120, now it is more like I leave with $200 worth that I pay $160 for. One of my New Year’s resolutions is to get more proactive with rebates. All of my local stores offer programs that make rebating easier, now I just need to do it.

9 Kristin October 3, 2011 at 9:08 PM

Wow! What a great chart and article! Thanks for breaking it down for us!

10 Beth October 4, 2011 at 8:50 AM

You’re very welcome!

11 Beth December 8, 2010 at 11:58 PM

Christa, I’m glad you appreciated that. It gave my husband a chuckle, since he literally asks me this every week when I come home from shopping :)

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