Tuck marketing professor Scott Neslin examines the profitability of digital coupons and finds some nuanced answers.
If you have shopped online recently, you are probably familiar with promo codes. They are digital coupons that require the customer to enter a specific combination of letters (and sometimes numbers) at checkout to redeem a discount when purchasing.
At Tuck, Scott Neslin has taught Statistics for Managers, Marketing Management, Sales Promotion, Customer Analytics, Marketing Research, Marketing New Products, and Decision Analysis.
Often, customers learn about promo codes in emails from retailers. Promo code coupons are today’s version of the once-ubiquitous print coupons distributed in Sunday newspapers. Today, promo codes are eclipsing print coupons in popularity. In 2018, Juniper Research projected that the value of redeemed promo codes would surpass $90 billion in 2022, almost double the value redeemed in 2017.
Deal-prone consumers love promo codes because the coupons let them save money while feeling savvy, says Neslin.
Retailers, meanwhile, are fond of promo codes because, like the print coupons of yore, they provide direct-to-consumer marketing that allows them to communicate their brand message and offer discounts to consumers who are price-sensitive enough to use them.
Emerging research on basic website price-off promotions is showing that they increase sales and cause “slippage”—when consumers purchase and could have used a coupon but didn’t. Less is known about emailed promo codes, which are unique because they require the consumer to make an effort to redeem the discount. In a new working paper titled “The Antecedents and Consequences of Promo Code Redemption,” Scott Neslin, the Albert Wesley Frey Professor of Marketing at Tuck, and his coauthor, Wenyu Jiao, associate professor at the School of Management, University of Science and Technology of China, study promo codes by examining three areas: profitability, antecedents to redemption, and slippage.
Through a field experiment with data provided by a U.S. apparel retailer where, on a randomized basis, some customers were emailed a promo code coupon and others not, the coauthors developed a statistical model of slippage, antecedents, and profitability. The model
traces the process by which consumers open emails, click on them, and purchase either using or not using the promo code coupon, Neslin explains.
The field experiment showed an ROI that ranged from 134 percent to 315 percent during the promotion period. But this was not the bottom line. The researchers found that promo codes generate significant purchase “acceleration”—they cause people to buy what they eventually would have purchased without the promo code promotion, only sooner. Slightly offsetting this drag on profits is evidence that promo code coupons increase long-term loyalty among some consumers. When the coauthors accounted for acceleration and loyalty effects, promo codes were still a winner, with ROIs ranging from 43 percent to 214 percent.
Regarding the factors that led to promo code redemptions, the coauthors found they lined up with the classic “motivation, opportunity, ability” framework that explains why people take advantage of promo code coupons. These factors included loyalty (which motivates consumers to redeem), deal proneness, and previous opens and clicks (which suggest the consumer has the experience and hence the ability to navigate the requirements for redeeming the promo code).
These consumers are leaving money on the table, but there are reasons for it.
Finally, the researchers found that promo codes, like other coupons, cause slippage.
These consumers are leaving money on the table, Neslin says,
but there are reasons for it. He found slippage is more likely among consumers who are retail oriented, instead of discount oriented. The coauthors also uncovered evidence suggesting slippage customers find promo coupons too difficult to use and would rather not expend the time and effort required. In that sense, they are making an optimal decision. But from a firm perspective, they bypass a discount opportunity and this increases profitability.
Taking a broader view of promo codes, Neslin explains that they cause an initial bump in profitability (from acceleration), then a loss in sales one month later due to acceleration, and finally a slight increase in customer loyalty.
The key lesson is to evaluate these promotions in the long term, Neslin says.
This story originally appeared in print in the winter 2023 issue of Tuck Today magazine.