Do You Have a Coupon for That?

Consumer online spending habits continue to evolve, and as average shoppers look for new ways to stretch their budgets during tough economic times, online coupon usage has grown. In fact, online searches for coupons and offers have increased by 58 percent over the past year, according to a recent study from Interpublic Group.

Savvy shoppers are becoming more familiar with online coupons and the potential savings they can provide. On the surface, this presents a major opportunity for online merchants that use coupons as a means to market and promote their products, but a closer look reveals a dated and ineffective process.

Major flaws in the way merchants utilize coupons online can dramatically increase marketing expenses while reducing profits. Retailers have made dramatic adaptations to the evolving e-commerce market over the past decade, yet couponing is still stuck in a brick-and-mortar mentality.

Traditional coupons are distributed to a predetermined set of recipients through newspapers, direct mail or in-store promotions, giving a merchant some control over their targeting. Online coupons, however, are very different and require a new set of rules in order to be used effectively.

Because of the Internet’s viral nature, a coupon code given to a single person today can be in the hands of thousands of people tomorrow by way of email and search engines. Online merchants that use traditional coupon networks are hurting themselves by eroding margins. Misusing online coupons puts merchants at a higher risk of cart abandonment, cannibalizes legitimate traffic, forces them to shell out more money to affiliates, and attracts customers with low lifetime values — all while discounting their products.

A New Problem: Coupons and Cart Abandonment

One of the most common obstacles online merchants face is shopping cart abandonment. In the US$600 billion e-commerce industry, 60 percent of all transactions end in abandonment — largely because online shoppers are bargain-hunters. A recent survey conducted by PayPal and comScore found that nearly 30 percent of shoppers abandon their carts in order to compare prices at other Web sites, and the misuse of online coupons can strongly contribute to that habit.

It’s hard to imagine a shopper at your local grocery store with a cart full of items walking out the door when the cashier asks if they have a coupon, but that is exactly what is happening online. With numerous coupon codes available through a quick Google search, simply accepting coupon codes at checkout significantly increases an online merchant’s risk of cart abandonment. A “Coupon Code” box on the checkout page only takes up a few pixels, but just by seeing it, savvy shoppers are reminded that they may find a better deal elsewhere and will leave in search of the best coupon. This is problem No. 1.

Problem number 2: Even if a shopper does return to make a purchase, the merchant might be forced to pay an affiliate bounty to the coupon site that sent — or rather, resent — the traffic.

Problem number 3: By driving potential customers away from their sites by using coupon codes, merchants are cannibalizing legitimate, organic traffic that they’ve spent good money trying to acquire. They’re working against their investments in buying keywords and wasting the time and effort they’ve put into optimizing SEO.

Problem number 4: Coupons have developed a reputation for delivering low-quality customers because they are predominantly distributed through coupon and deal sites, which attract bargain-hunting shoppers with low lifetime values and no brand loyalty.

Problem number 5: By definition, offering a coupon means that a merchant is discounting its products. In addition to increasing cart abandonment, paying more affiliate bounties, cannibalizing traffic they invested time and money to acquire and attracting shoppers with low lifetime values, merchants that misuse online coupons are lowering their profit margins by discounting their products.

Attain, Retain and Gain

Despite all the pitfalls, there are several solutions available for online merchants to effectively take advantage of coupons and increase revenue. In order to do so, they must first learn how to effectively segment their customers.

Coupons mean different things to different people, but for anyone who sells a product, coupons are a way of segmenting pricing based on willingness to pay. While many people spend hours clipping, collecting and collating coupons from newspapers, others are perfectly content with paying the full price without spending the time clipping.

One reason offline coupons seem to work is that there is so much effort involved in redeeming them — this is a natural segmentation process. If time is money, then those with more money aren’t likely to spend the time clipping coupons and will instead pay full price. Those on more of a budget need the coupons to justify and trigger the purchase.

In the online world, properly executed email campaigns can be an effective way of disbursing coupons to the right group of people — those who created an account, joined a mailing list, etc., but did not make a purchase.

Another valuable strategy is to leverage one-time-use coupons. These can be delivered via email or presented to shoppers who have just completed a complementary transaction from another merchant’s site. By utilizing this strategy, merchants can make the most out of coupons to attract targeted, high-quality customers and at the same time, expose their brand to a targeted audience that is likely to have an affinity for their products or services, thus increasing the chances of making a sale.

These types of purchase incentives can also be used to entice customers to add more to their shopping carts. By replacing expensive promotions like free shipping and deep discounts at the checkout with coupon incentives that have a high customer-perceived value, merchants entice shoppers to complete the transaction and boost their average order size.

Not all coupons are created equal. Do your homework and understand how they work, because there is tremendous opportunity to increase traffic and conversion rates from more price-sensitive shoppers.