How much can I spend on a new-customer welcome offer?

A welcome offer is the most common coupon in small stores. A first-time visitor sees a banner, gets a code for Rs 100 off, and hopefully buys. The question is how much you can afford to give away to win a customer you have never met.

Think in hundreds

Work with a group of 100 new customers. It makes the numbers easy to see and easy to scale. Suppose the offer is Rs 100 off the first order, and you expect 40 of the 100 to redeem it.

Forty redemptions times Rs 100 is Rs 4,000. That is the cost of the welcome offer for this group.

The other 60 do not use the code, so they cost you nothing. This is the quiet advantage of a welcome offer. You pay only when someone actually becomes a customer.

What does a redeemed order earn?

Now look at what those 40 orders bring in. Say your typical first order earns Rs 200 of profit before the coupon, meaning selling price minus product cost, shipping and packing. Forty orders at Rs 200 gives Rs 8,000.

Take away the Rs 4,000 coupon bill and Rs 4,000 remains. Divide by the 40 redeemers and each new customer leaves you Rs 100 after the discount.

That is the test to run on any welcome offer: after the coupon, does each redeemer still leave a positive amount? Rs 100 per customer is healthy. If the offer were Rs 200 off, the same order would leave nothing, and you would be working for free.

How much could you spend?

Use this rule: the welcome discount should be smaller than the profit the first order earns before the coupon, and you should be comfortable with what remains. In this example the first order earns Rs 200. A Rs 100 discount keeps half. A Rs 150 discount keeps Rs 50. Any amount at or above Rs 200 gives away the entire profit.

You can accept a thin or even zero first-order profit if you know customers come back. That is a bet, and it is only safe once you have your own repeat-purchase figures. Until you have them, aim to break even or better on the first order.

Protect the offer from abuse

• Make the code valid for one use per customer, if your setup allows it.
• Put a minimum order value so that people do not claim Rs 100 off a Rs 150 order.
• Do not run the welcome offer at the same time as a big sale.
• Check now and then that the same people are not collecting it again under new numbers.

Is a discount the only welcome?

Not always. Free shipping above a threshold, a small free gift, or a sample can cost you less than Rs 100 and feel just as welcoming. Work out the cost of the gift, the same way, per hundred buyers.

You also want the new customer to return. The offer buys the first order, and the second order is where the profit usually shows up. Read the repeat customer is the whole business to see why. If you are working out the right size of any discount, the biggest coupon you can offer without losing money gives the ceiling formula. For how to collect addresses to follow up with, see building an email list from day one.

Set the welcome offer once, per hundred customers, and review it after your first batch of redemptions.