Coupons, free product with purchase, and money-back guarantees are three effective redemption based promotions that can increase awareness and sales for a new product launch.
When creatively designed and successfully managed, these promotions have been proven to work, influencing even brand-loyal customers to give a new brand a try because of its affordability. However, any redemption promotion (including cash prizes or other rewards) comes with a risk, which, ironically, is that the promotion will be too successful.
In projecting the risk for a promotion is accurately determining the participation level. If you underestimate that level, you are also underestimating the financial risk (i.e., potential cost) of the promotion. That’s why too much response could have negative ramifications.
For example, suppose you print 1 million offers for a free product with a purchase, an offer with a $4 value. It’s easy to see you could potentially pay out $4 million in redemption costs—a risk that might be too great to bear. But you also know that redemption will probably be far less than 100 percent, so you calculate risk based on the 10 percent participation you expect, therefore estimating the cost at $400,000.
What happens if you anticipate these figures, and the actual participation turns out to be 25 percent? Your budget is blown by $600,000—more than the original cost you projected! The promotion’s success in attracting consumers is exactly what you want, except that the promotion is costing more than was allocated for it.
Redemption Coverage to the Rescue
The solution to this Catch-22 is redemption coverage. This form of insurance protects a company from the risk of a promotion having more participation than expected. For a premium that’s far less than the amount at risk, a company can cap its exposure at a fixed amount.
What this means for new product launches is that valuable, compelling promotions can be offered within a restricted budget—with no risk of breaking the bank. Costs can be reliably projected, with unacceptable financial outcomes taken off the table because of the redemption coverage. You’re getting all the benefits of the promotion with only a fraction of the risk.
Another benefit of redemption coverage is that it frees the company from the need to hold money in escrow to pay out excess claims. Instead, that money can be funneled into advertising the campaign or future market initiatives.
Don’t let the fear of higher-than-expected redemption costs discourage you from using these types of promotions with new product launches. When properly planned and executed, redemption offers are effective in encouraging consumers to try new products—and you can lay off any unacceptable financial risk by taking out redemption coverage. You’ll be paying pennies on the dollar for the marketing value you’re getting.
I’m a Managing Partner at Insured Creativity.
- Promotional Insurance