On the Plus Side

"Coupon codes represent a large part of [our] marketing budget," says Ben Bohannon, 32-year-old CEO and founder of Anzen Corp., a Denver inkjet remanufacturing company that manages Inkjetusa.com, a Web site that sells printer cartridges and printer paper. Bohannon says he started using promotion codes last year and now works with many coupon sites, including CoolSavings.com and DailyeDeals.com. Inkjetusa.com's coupon offers range from $20 off a $50 or $60 order to 10 percent off any order. They're used to push new products or to liquidate old ones. Inkjetusa.com offers new deals continuously, and the coupons are redeemed on a daily basis.

Bohannon points out that promotion codes have been very successful for his business, which brought in revenues of $7 million in 2002. "One coupon code alone generated more than $60,000 in revenue for us last year," he says. In addition, Bohannon says that 25 percent of his company's sales now come from coupon codes. "Everybody likes a coupon and likes to feel like they are getting a special deal."

The Problem With Codes

"When a Web site asks, 'Do you have a promotion code? If so, enter it,' they are pointing out to some consumers that they don't have the code," explains Mikhael Shor, an assistant professor of economics at Vanderbilt University in Nashville, Tennessee, who co-wrote the study, called "Price Discrimination Through Online Couponing: Impact on Purchase Intention and Profitability," with Richard L. Oliver, professor of management. "We found that the very fact that a Web site asks consumers this question leads many people to say, 'I am not happy with the shopping experience' and then end up not completing the purchase."

Matthew Moog, president and CEO of CoolSavings Inc., the Chicago company that runs CoolSavings.com, says some of his retail customers who offer discount prompts are aware of the problem. However, he says that e-merchants can work with the coupon sites to set up a system in which the consumer can click to a special page that keeps the discount in front of the customer as he or she shops.

In this example, at checkout, the e-tailer's system automatically enters the discount to the shopping cart or prompts the customer to do so. Meanwhile, customers without the discount are shopping at the regular pages.

Shor also says that the fact that these coupon codes are passed around so freely on the Internet is antithetical to their purpose. "If every single person shows up with a coupon code, they'll probably all be pretty happy," explains Shor. "But then, in some sense, you are not segmenting the population. You are just giving everyone a coupon code and hoping they all feel they are getting a good deal and are special in some way. Whether that will work in the long term, and if people will start catching on, is a different question."

Most e-tailers, however, do not mind that many consumers use the codes and pass them around the Internet. They believe such word-of-mouth advertising is a good way to build a customer base.

In addition, e-tailers can set up the promotion code in such a way that once they reach the number of offers they want to distribute, they can easily turn off the offer so it's no longer valid. They can also prevent rampant coupon-sharing by making the coupon available only for first-time customers. And finally, e-tailers can issue a coupon that can be used only once. These coupons are often called gift certificates by e-merchants.

However, not all e-tailers have the right technology in place to limit the number of times a coupon is used. To ensure you're getting the most out of offering promotional specials, Moog recommends requiring a minimum purchase and making the coupon value no more than 20 to 25 percent of the minimum purchase product price to discourage coupon abuse.

Finally, coupon codes are popular because they give consumers an opportunity to get a special offer, which is always enticing. "Offering some type of coupon or discount or promotional offer is the best single way to build a customer base and attract new customers to purchase at your store," says Moog.

So what's the verdict? You can still use coupons to promote your site—just make sure they're really working for your business, not against it. But remember, coupons are just one way to entice repeat business. For more ideas, see last month's "Net Profits" column.