Coupon Crack: how to avoid dependency on discounts to grow your business

Although I my expertise is strongest in Internet marketing, this little lesson is applicable even to businesses that have no Internet presence at all. It's the story of Coupon Crack, how you get hooked, and why you should avoid it.

Back in 1999, I was leading customer acquisition at Half.com, an e-commerce marketplace where users could buy and sell new and used books, movies, CDs, and video games at a fixed price. Our customer value proposition was driven by price and breadth of inventory, and our success rested on our appeal to price-sensitive users and the quality of our site, which removed friction from person-to-person transactions.

To attract new customers and keep existing customers active, we employed a wide variety of discounts, usually in the form of a code that was entered and redeemed at the Shopping Cart. As we continued to experiment with different offer configurations to optimize conversion and net revenue, we came to a startling conclusion.

We were addicted. To Coupon Crack.

It hit us suddenly, but developed gradually. As we fielded an array of tests, we came to know which special offers would generate the most clicks and highest conversion rate. In our quest for efficiency, we discarded those that delivered marginal conversion rate improvements. But the visit increases and conversion rate improvements were the "lure", and net revenue impact was the hook: the coupon offers that were most advantageous for customers generated the desired order volume and conversion rate, but yielded the lowest order sizes and smallest net revenue per order.

This led to a dizzying crush of analysis: acquisition cost vs. LTV, repeat order ratios for redeemers of various offers, efficacy of marketing spend with offers of each type, etc. etc. It was numbing, but the fact remained: when we needed to hit the numbers (for either new customer acquisition targets or retention revenue goals), we reached for the coupons.

And it had a terrible impact on the business.

Because it trained customers to respond to only to coupon stimulus, like capitalistic Pavlov gone wrong. And this training often began at very first stage of their relationship with the company. We reserved our most alluring coupons for new customers only (a lesson in customer coupon sensitivity we learned the hard way), and most of our online advertising depended on these offers. Then because the retention was a separate entity with their own numbers to hit, they would occasionally (and sometimes against their will) send coupons to our entire registered user base to hit an end-of-quarter number that might have otherwise been missed. This cemented the behavior pattern: if you were a Half.com customer, you started with coupons, and if you waited along enough, we'd send you another one. And you made sure to stockpile items on your wishlist so you were ready to buy when the next coupon arrived, but not likely until that event.

That's crack.

Now, bear in mind that I was only deeply familiar with the Customer LTV figures for the first 3 years of the company's existence, before the company really undertook any earnest effort to wean itself from the addiction. Eventually, the LTV might have supported such tactics as customers grew to view Half.com as the single source for all media purchase and stopped looking elsewhere (the Amazon Marketplace became a very compelling alternative as Half.com diverted focus to new categories). But weaning took time, as new customers who initiated their Half.com "relationship" with a coupon eventually came to find that that was the only coupon they'd get, and no additional coupons would be forthcoming in the company's effort to "pull revenue forward". Those customers could comfortably purchase at any time, at impulse, and be assured that they would not "miss out" on an coupon that they might have received if they'd delayed their purchase.

I could ramble on about this forever, and if there is interest in the topic, I'll be glad to go into some further detail, but I'll summarize the lesson as this: Marketing professionals MUST think like the customer, and dress themselves in customer behavior at all times. Go on record with your rationale as to why perpetual discounting is detrimental to the business, even if if helps you hits your numbers this month. You may not assuage the vibrations from the Finance wonks who are clamoring for a Money Button on the Marketing dashboard that will yield immediate revenue, but you'll spare the business a painful blood-letting of flat retention revenue until your customers' behavior is re-wired for more "organic" consumption.