Free premiums are usually small gifts or merchandise included in the product package or sent to consumers who mail in a request along with a proof of purchase. In/on-package free premiums include toys, balls, trading cards, or other items included in cereal packages, as well as samples of one product included with another. Surveys have shown that in/on-package premiums are consumers’ favorite type of promotion. Package-carried premiums have high impulse value and can provide an extra incentive to buy the product. However, several problems are associated with their use. First, there is the cost factor, which results from the premium itself as well as from extra packaging that may be needed.
Finding desirable premiums at reasonable costs can be difficult, particularly for adult markets, and using a poor premium may do more harm than good. Another problem with these premiums is possible restrictions from regulatory agencies such as the Federal Trade Commission and the Food and Drug Administration or from industry codes regarding the type of premium used. The National Association of Broadcasters has strict guidelines regarding the advertising of premium offers to children. There is concern that premium offers will entice children to request a brand to get the promoted item and then never consume the product. The networks’ policy on children’s advertising is that a premium offer cannot exceed 15 seconds of a 30-second spot, and the emphasis must be on the product, not the premium. Since most free mail-in premium offers require the consumer to send in more than one proof of purchase, they encourage repeat purchase and reward brand loyalty. But a major drawback of mail-in premiums is that they do not offer immediate reinforcement or reward to the purchaser, so they may not provide enough incentive to purchase the brand. Few consumers take advantage of mail-in premium offers; the average redemption rate is only 2 to 4 percent.
Free premiums have become very popular in the restaurant industry, particularly among fast-food chains such as McDonald’s and Burger King, which use premium offers in their kids’ meals to attract children.38 McDonald’s has become the world’s largest toymaker on a unit basis, commissioning about 750 million toys per year for its Happy Meals (Exhibit 16-18). Many of the premium offers used by the fast-food giants have cross-promotional tie-ins with popular movies and can be very effective at generating incremental sales. McDonald’s gained a major competitive advantage in the movie tie-in premium wars in 1996 when it signed an agreement with Disney giving McDonald’s exclusive rights to promotional tie-ins with Disney movies for 10 years.
One of the fastest-growing types of incentive offers being used by marketers is airline miles, which have literally become a promotional currency. U.S. airlines make more than an estimated $2 billion each year selling miles to other marketers. Consumers are now choosing credit-card services, phone services, hotels, and many other products and services on the basis of mileage premiums for major frequent flyer programs such as American Airlines’ AAdvantage program or United Airlines’ Mileage Plus program.