Coupons often increase conversion rates.
Coupons often increase average order values.
However, they don’t always lead to more profits.

In fact, its possible to offer coupons, see your conversion rate go up and see your profits diminish.

In this article we will look at the math you should be conducting to determine the effectiveness of your coupons. This should also help you decide if you should offer coupons or stay away from them.

Baseline Statistics without a Coupon

First you need to establish your non-coupon stats. Take an ad group where you are considering using the coupon and build a simple chart:

Most of these stats will come directly from your paid search account. However, you will need to layer in your margin if you sell physical goods.

In this formula, profit is calculated by: ((Conversions * Average Order Value * Margin) – Spend)

Coupon Math For Single Sale Items

Often for lead generation sites, sites that sell single item, or membership sites, the average order value does not increase with a coupon. In this section, we will assume that the average order value is stagnant, and then look at the baseline versus a few offers.

For simplicity, we will leave the CTR and the clicks stagnant. If your CTR does start to change, then you would need to take into account the change in clicks, spend, and total conversions.

Profit in this chart is: (((Conversions * Average Order Value * (1-Discount)) – Spend ).

The worst case scenario is offering a discount and then not seeing a change to conversion rates.

In this selection of offers, only once our conversion rate increases enough to offset the discount did we actually see a change in profit. Often to see a change in profit, you need to see either a nice increase in conversion rates or more total clicks (higher CTR ad copy with a discount offer) to offset the loss of profit on each sale due to the coupon.

Let’s take a look at the same chart; but assume CTR also increased (and CPC remained static):

In this case, Offer B with a lower discount and a slight bump in conversion rates is actually a more profitable offer than D which has a larger increase in conversion rates and CTR, but also utilizes a much steeper discount. Bigger isn’t always better.

Now, this does assume that you only make one sale per year. If you have multiple sales to the same customer each year, then you need to take that into account.

Coupon Math For eCommerce

According to Compete, the average sale price without a coupon (in one study only) was $122. The average sale with a coupon was $216. Coupon usage often increases average sale amount. There was a recent study (which I cannot find, if you know where it is please let me know and I’ll link to it) that the average person with a gift card spent $33 more than the face value of the gift card.

Just because its on sale does not mean its free.

Sometimes consumers don’t quite get that advice.

Let’s look at the same chart, but also manipulate the average order value (again we’re going to skip the math of margins for now)”:

Almost any offer that affects average order value in any meaningful way along with conversion rate can have dramatic effects on the total available profit.

In this case, every single offer is better than the baseline, but that’s because both conversion rate and average order are being manipulated.

Conclusion

Offering coupons can increase your conversion rates, average order value, and profits. However, you need to be careful that you aren’t discounting your goods and services to a point where you would make more profit by not offering any discount at all.

When discounts are ineffective, your bottom line can suffer.

When discounts work well, you can see a nice increase in total profits.

Just do a little math before you offer a coupon so you understand the change in metrics that need to occur for you to have higher profits while offering a discount.