The Fundamentals of Coupons

During my time at BookRenter, I got a front row seat as colleges much smarter and more experienced in the ecommerce space drove growth through couponing. Now, at a much earlier stage startup, I’m faced with decisions about when we should and shouldn’t offer coupons, and the framework through which to approach it.

Should you Offer Coupons at all?

  • So let’s say you are selling something on the internet. Maybe it’s an online course like Bloc  or maybe it’s a whole catalog of things like BookRenter or JCrew.  Eventually you’re going to want to try offering coupons.
  • Why offer coupons? The most common use for coupons is price-discrimination. We’ll get back to this later, but here are a couple other reasons you might use coupons to keep in mind. One is tracking – you can put a coupon in a TV commercial and see how many people use that coupon to get a sense of how effective the commercial was. Another reason to use a coupon is for customer service – either to thank loyal customers or to assuage the anger of unhappy customers. As any small business owner will tell you, it’s often better to give them a coupon for their next purchase than to refund them for their last purchase!
  • Price Discrimination: You may remember from Econ  101 the Keynesian economics concept of the demand and supply curves. See the graph below. That green line is the demand curve. If the price is $100, the demand is very low. If the price is 0, the demand is very high. Within that demand curve there may be multiple segments. In this case, let’s say you are looking at the demand curve for J.Crew. There are plenty of folks who shop at JCrew who are upper-middle class and in their late 30s, 40s, and 50s and can afford to pay $50 for a nice polo shirt. So JCrew designs for those people, and it prices it’s Polos at $50 a shirt. At $50 a shirt, they will sell 20 shirts = $1000 in revenue – represented by the yellow box.
  • Price Discrimination and Couponing

    Price Discrimination and Couponing

  • Now let’s say they’re starting to see growth slow down. And they know they already have a huge share of those 50-somethings.  Meanwhile, they know all these younger 30-somethings and 20-somethings feel JCrew is too expensive and won’t shop there, even though they like the style. They want a way of making JCrew accessible to this group of people. If they don’t, young people may spend their whole lives shopping at a competitor like Express or Gap, and JCrew will lose it’s edge with this young but up-and-coming group.
  • So why not lower prices? If they lower prices, to $30, they’ll sell 30 shirts, so that’s $900. That’s less money than the $1000 they are making now! They can’t do that! Plus, if they lower prices, their regular customers will think the clothes aren’t really worth $50, and will expect prices that are lower too! The way they do this is through price discrimination!
  • Younger shoppers are more attuned to channels like online coupons, Facebook coupons, and mobile app coupons. So if they create coupons and place them in just these specific channels, they can try to target younger savvier shoppers who are more price-sensitive. By offering this group a $20 coupon, they effectively make the price $30 for these people, and unlock the blue square of extra revenue.
  • How much can they make this way?
    • They’ll sell the first 20 shirts at $50 per shirt, making $1000
    • AND they’ll be able to capture another 10 shirts at $30 per shirt, making another $300 in the blue square
    • for a total of $1300 in revenue.

Add a Coupon Box at Checkout vs. Coupon-through-a-link

  • So now we know why JCrew might want to add a coupon. Here’s a good question – on the online checkout page – should they add a coupon box or do all coupons through a link?
  • If they use a link, then all users coming to the site off of a coupon-link will be cookied, and will be shown the cheeper price at checkout. But if a user leaves and comes back after clearing cookies, they’ll lose the coupon and be unhappy with the experience.
  • If they have a coupon box on the checkout page, that box might actually encourage customers and train customers to go out and look for coupons. This isn’t good, because this means people who might have paid full price might stop and go coupon-hunting. We’ll get to coupon-hunting later.
  • Ultimately, most companies feel that it can be confusing and that the safest course of action is – if they offer coupons at all – to add a coupon box at checkout.

Multi use vs. Unique Coupons

  • Now let’s say you gave a coupon to a loyal customer as a special thank-you. And let’s say it was a really JUICY coupon for 50% off on ANY item. Now what if that coupon gets onto twitter? Worse – what if it gets onto one of those deal websites like SlickDeals.net? All of a sudden, this coupon that was for one specific person is being given away to millions of people and you are losing money on every order!
  • This is why you might consider building totally unique coupon codes. You’ve probably used these. Sometimes coupons will be something like “Save5” but other times they’ll be some random number-letter combination – those ones are usually the single-use kind. This type of coupon can only be used one time, by one person, and then never again. That way, there’s no risk.
  • If it had been  awhat if the company that you set up the partnership just leaks their coupon online? then anyone googling for a coupon will find theirs, and you’ll be paying them for users they didn’t actually drive.
  • at this point you start wanting to create coupons that are for one single person to use. give them a stack. and they can give each of their users a unique single-use coupon and prevent leakage.
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