Coupons are the proverbial golden tickets of sales. Or they seem that way, until they devalue your product, slow your growth, and ruin your brand.
Though coupons can be a powerful force to drive sales, they can have unintended, disastrous effects. Just ask Rachel Brown of Need A Cake Bakery in London, who lost $20,000 in a nightmarish response to a cupcake coupon.
The negative effects of offering coupons aren’t always that obvious (or high in refined sugar), especially because you intend for coupon offers to help your business.
Take a look at the different goals you might be hoping to achieve with coupon codes and how each might backfire. Then see how you can achieve these goals without using coupons and build a stronger business in the process.
Your goal: Offer lower prices than your competition
When you’re in a competitive market with other companies that sell similar products, you might think that a coupon code for a lower price will win you the customer.
But in the race-to-the-bottom, you’re not playing to win. Consistently offering discounts or dramatically slashing prices conditions your customers to believe that your product or service is less valuable. Price Intelligently, a price consulting company, shows that discount customers undervalue the product’s bottom line as shown by their willingness to pay (WTP).
Providing discounts for the sole purpose of competing on low prices not only devalues your product, but it also creates doubt in your customers’ minds. Stanford Business, in a study on comparative advertising, found that pointing out the price difference between your prices and a competitor’s makes the customer fear they are somehow being tricked.
The real solution: Add more value to your product
Instead of distinguishing yourself from the competition as the “low-price leader,” distinguish yourself by providing other value. Then not only will you stand out from the competition, but you’ll also be adding to the value of your product rather than undermining it. You can do this by:
- Adding a unique feature to a product or highlighting a little-known feature that is different than what competitors offer.
- Providing excellent customer service to distinguish you from other companies. Most companies aren’t as good at customer service as they think. While 80% of companies say they have superior customer service, only 8% of their customers agree.
- Showcasing your company culture to give customers the opportunity to feel a human connection to your brand. This leads to customer loyalty and trust, so don’t be afraid to wear your quirks on your sleeve.
Your goal: Attract new customers and encourage first-time purchases
Research by VoucherCloud found that 57% of shoppers are motivated to complete a first-time purchase when they are able to redeem a coupon. Toss a coupon code out there and you’ll be shooting sitting ducks, right?
Not quite. Coupon codes will certainly draw attention and, in some cases, motivate purchases—but you’re probably not attracting the kind of customer you want.
The ideal customer will return to purchase from you and will pay full price for your product or service. When you capture new customers with a coupon code, you don’t know if they’re more interested in the product or the discount.
Science shows that people like to use coupons simply for the thrill of getting a discount. Coupons.com found that shoppers who received a $10 voucher experienced a 38% rise in their levels of oxytocin, a positive-feedback hormone. They also experienced decreased heart rates and respiration rates, indicating lower stress levels.
These coupon-seeking customers are particularly detrimental if your product is a subscription service. Customers might use the coupon to sign up, but if they are not the right customers for the product, they will cancel and immediately churn out. This leads to an overall higher churn rate than is justified for your product. This only compounds as you grow in size and publicity and attract more one-hit wonder customers.
The real solution: Focus on customer loyalty
Instead of using coupons to snag customers who might only be in it for the deal, use coupons to reward loyal customers who complete many purchases with you to keep and build your loyal customer base:
- Know the Lifetime Value (LTV) of a customer, or the approximate projected revenue that a customer will generate during their time with the company. An excellent infographic for calculating LTV can be found here.
- Use a customer loyalty application like LoyaltyLion to allow customers to directly reap benefits from actions that support your company.
- Offer benefits to customers who like, share, and refer others to your company and you’ll build brand loyalty while spreading the word to new customers.
Your goal: Sway current customers to purchase different items
Providing coupon codes for specific items can draw attention to specific inventory or services. It is particularly tempting to do this for items that are less popular and don’t sell as well.
The problem with this strategy is that you’ll lose your market for those specific services when you offer them at full price again. Your original price might not be working if you don’t have a good product-market fit.
A good product-market fit means that you’re in a market where people are interested in your product, and you have a product that people will happily pay for. Figuring out this fit is a process that involves shaping your market just as much as it involves shaping your product as this flowchart shows.
Early product development and customer/business development should go hand-in-hand. Both processes have various stages and require you to assess your progress at each stage.
As you create the opportunity for people to discover your product and to find benefit, you create your customers. When you have the product and the market, then you can build your company.
Discounts mean nothing if you don’t have a good product-market fit. You need this as a foundation before you start aiming for growth through promotions.
The real solution: Create a better product-market fit
Instead of pushing your underperforming products and services with coupon codes, ask why this product isn’t selling at full price and try to fix the underlying problem:
- Read customer reviews and go over customer service feedback to learn about your market. This will help you understand how customers view the value of your product and how well it meets their needs.
- Explain the benefits of your product or service more clearly to help customers understand your industry and understand the value. You can do this by changing the copy on your website to be more explicit or by publishing content to help your customers learn.
- Remove simple pain points that might exist around this product by rephrasing its pitch, renaming, or writing the price in a different way.
Your goal: Learn about customers’ buying pathways
Using coupon codes can have value when you want to find out more about how customers navigate to make purchases and what effects their buying decisions. You can test two versions of the same advertisement—one with a coupon code and one without—and experiment whether the coupon makes a difference in sales and customers when everything else is equal.
But if you only test one coupon/no-coupon combination, you won’t really know if the success of the coupon ad (or the non-coupon ad) is related to the coupon at all. You’ll show correlation, but you won’t prove causation.
There are many many aspects of your ads that you can vary—the addition of a coupon code is just one. The experiment below ran two different ads with the same goal of driving membership purchases before a price increase.
The ads have different copy, image, and target audience and saw drastically different results in cost per click and return on investment.
The real solution: Vary many aspects of ads in your tests
You need to be sure that the coupon code is having a predictable effect on sales to learn about the online shopping behaviors of your customers. Run multiple tests featuring different coupon codes and different iterations of the ad:
- Experiment with different types of Facebook ads, such as domain ads, multi-product carousel ads, and dynamic product ads. Different types of ads can be supported in different placements like Facebook’s right column, the desktop newsfeed, and the mobile app platform.
- Vary the design of your ad by changing the copy, the image, or the call-to-action.
- Offer different types of coupons in your tests like two-for-one deals, percentage, or dollar-based discounts, and free shipping.
Are coupons the golden tickets?
The goal of any promotion is to generate interest in your brand and prompt desire for your product for which customers will return and pay full price.
If you’re thinking about using a coupon code as a quick-fix to meet objectives or push unpopular products, step back and consider how you can fix the underlying problems.
If you focus on bottom lines like product and brand quality, customer loyalty, and product-market fit, you’ll build a stronger business that will thrive with or without coupon codes.