One of the best marketing experiences of my career was working with a team of ecommerce veterans at BookRenter. Couponing is a complex needle to thread. A generation of founders who venerate Steve Jobs tie themselves in knots wanting to avoid discounting, and fail to grow the business. Meanwhile promotion-happy marketing teams can train customers to wait for discounts before purchasing, destroying margins and devaluing the brand. Here’s my framework for doing it right.

Should you Offer Coupons at all?

There are a number of important use-cases for coupons:

1. The most common use for coupons is price-discrimination

2. Another is marketing attribution – especially when tying offline marketing channels to purchases. You can put a coupon in a TV commercial, but you can’t put UTM parameters.

3. One additional rationale for couponing is as a salve for poor customer experiences

4. In my experience the single most powerful reason: if a discount is packaged right, it can trigger loss aversion and get customers who are considering a purchase to get off the sidelines and pull the trigger.

Price Discrimination

Let’s start with 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.

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!

Price sensitive shoppers and younger shoppers are attuned to discounting channels: they know to look at sites like Retailmenot and SlickDeals.net. But mainstream customers won’t go out of their way to find these websites, allowing you to still charge full price to those customers.

Should You 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.