When discount codes work

Discount codes have become a default conversion optimisation tactic.

Give people 10% off and there’s a greater likelihood they’ll purchase.

Or so the methodology goes.

10% discount equates to £100k revenue given away for a £1m turnover business.

That’s a lot of gifting.

The problem, as I see it, is we’ve become technology-led. Thanks to the simple integration of coupon-coding into our ecommerce platforms (take Shopify as one example) because we can discount, we oftentimes do.

The insights we gather on conversion optimisation often lead back to the articles or webinars delivered by technology providers. Technology providers that use overlays, popups and other tools that ease the delivery of discount codes. See where I’m going here? Technology providers are naturally biased towards the use of discount codes.

The fact we, as consumers, are inundated with discounts and coupons flashed in front of our eyes all day long doesn’t help.

It leads to the common misconception that discount codes work.

Why? Because they’re everywhere. If our competitors offer 10%, shouldn’t we offer 15%? Concerning questions to raise. How high can the discount code go?



50% discount code

When discount codes work (for some)

For strategy-enabled retailers, discount codes can be a crucial element in both customer acquisition and retention.

The ecommerce brands that succeed (profitably) with discount codes apply the following learnings to their conversion strategy

  1. A fundamental understanding of customer lifetime value. They have calculated that the gifting of x% discount for a first time customer offers a leaner marketing cost than more costly retention practices. Put simply, that % discount is an investment in a long-term revenue generating customer relationship. This means that they’ve already in place a retention / customer experience strategy that offsets the initial discount. They’re already plotting the future value of that newly acquired customer.
  2. Coupon code a/b analysis. At particular points in the customer journey the ecommerce brand has tested the use of coupon codes as an incentive. They’ve witnessed a greater revenue per user rate when offering a discount compared with no incentive. On this basis they have been able to lower the acquisition costs through the use of the coupon code.
  3. Discount code limitations. In order to limit the use of codes, discount adopters are creating unique user-associated trackable codes. This means that codes aren’t made available through coupon consolidating websites. They are often time-limited and specific to non-sale items and/or first time customers. Codes are also linked to email addresses.
  4. Value per email address. Where coupon codes are used as a reciprocation (i.e. your email address for a 10% code) strategy, the business has a firm understanding of the value of a new subscriber. That discount offered proves to be a greater conversion strategy than search or social retargeting.
  5. Product-level analysis. For discount codes to delivery greater longer term profitability there is a clear grasp of the buyer habits (the products where discount codes are used) compared with non-discounted purchases. There’s analysis of the variations in average basket size in order to learn the impact on revenue when a discount code is used.
  6. Discounts are baked into the overall pricing strategy. When you know you’re discounting by 10% the sure fire method to counter the revenue loss is by bulking up prices by 10%. You’re creating a discount illusion.

Put simply, there’s analysis taking place and strategy adopted to understand whether the use of codes increases or reduces profitability per customer acquisition.

For the rest of us, there’s a good chance we’re giving away money without reason.

Here’s my concern regarding the use of discount codes

We’re not taking the time to understand the impact of discount codes upon our business. We’re working to a hunch and that hunch is led by the practices of other retailers.

Discount codes are used, at times, without consideration. I don’t like the idea of giving away money without much thought.

And what do we need to do about it?

We need clarity. Somebody need to take ownership of the analysis and to report upon the success/concerns regarding discounting tactics. A/B testing is the route. Switching off an overlay one week and relaunching it the next isn’t the answer. Customers behave differently week to week.  You’ll never get a true answer following this mentality.

No, the simplest way to test discount code success is through a/b testing the discount delivery methods and tagging customers. It’s not 100% proof, but at least it puts you in a better position to decide on the future use of codes as part of your conversion strategy.

I’m digging deeper into this topic of pricing strategy over the coming weeks. It’s an area that deserves discussion. Register for my newsletter below (no discount codes on offer) and I’ll let you know what insight I’ll be providing you.

Written By:

Ian Rhodes


Founder of Ecommerce Growth Co. I'm here to help your customers feel like buying your products is a no brainer. Sharing 24 years of ecommerce insight learning what motivates people to make their purchase.

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