Using discount codes to boost your E-commerce
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Discount codes are a powerful marketing tool to boost your e-commerce business. When used strategically, they can help attract new customers, retain existing ones, and increase your revenue. However, to maximise their effectiveness, they should be seamlessly integrated into your overall business strategy. In this article, you will discover how to make the most of discount codes to improve your performance while optimising profitability.
What is a discount code and why should you use it?
A discount code is a code that customers enter at checkout to receive a specific benefit on their purchase. This benefit can include a price reduction, free shipping, a free item, and more. Promo codes can be distributed through various channels such as newsletters, website pop-ups, affiliates, or influencers.
A discount code can serve multiple objectives within a e-commerce strategy:
Main objectives of a discount code
And various secondary objectives such as:
Secondary objectives of a promo code:
The three golden rules of discount codes
A smooth user experience (UX) is crucial for the success of discount codes. Customers should be able to redeem an offer easily, without confusion or frustration. The best practices for discount codes can be summarised in three golden rules:
- 1. Easy to remember
The code should be logical and easy to recall. Avoid internal coding and instead use a name that aligns with the promotion’s context. For example, a combination of the event, affiliate partner, shop name, or product category, along with the discount amount.
- 2. Easy to calculate
Choose rounded amounts or percentages that are impactful and easy for customers to mentally calculate.
- 3. Easy to apply
Avoid placing too many restrictions on the offer, such as an extremely short validity period, a highly limited product selection, or an excessively high minimum purchase amount.
To put these golden rules into practice, let’s consider a general e-commerce scenario. We will examine two contrasting discount codes—one that adheres to the golden rules and another that does not.
EXAMPLE 1
Code BFxf3004 for 28.35% discount on USB-A<>USB-C adapters from JBM brand, valid until 30/04, with a minimum purchase of €72
Does this code meet the golden rules?
=> Easy to remember?
❌ No. The code is just a random sequence of characters and numbers without any clear meaning.
=> Easy to calculate?
❌ No. The 28.35% discount is very difficult to calculate in your head.
=> Easy to apply?
❌ Still no. The date (30/04) is arbitrary and too restrictive. USB-A<>USB-C adapters are a very narrow product category, especially when the offer is only valid for one specific brand. Also, who buys 72€ worth of USB adapters in one go?
Conclusion: This code does not follow the golden rules and is unlikely to positively impact e-commerce performance.
EXAMPLE 2
Code BLACKWEEKELECTRO25 for 25% discount on electronics during Black Week
Does this code meet the golden rules?
=> Easy to remember?
✅ Yes, the code clearly indicates the target event (Black Week), the targeted product category (electronics), and the discount amount (25%).
=> Easy to calculate?
✅ Yes. A 25% discount, or a quarter of the price, is very easy to calculate in your head.
=> Easy to apply?
✅ Yes. The code is valid during a well-known time of the year and applies to a broad product category that is often in high demand during Black Friday.
Conclusion: This code fully adheres to the golden rules and is likely to have a positive impact on e-commerce results.
Determining the KPIs for our discount code (conversion rate, ROI, incrementality)
As we’ve seen, the primary goal of a discount code could be to increase the conversion rate, increase the average order value, or even boost visibility. Let’s explore how to measure these KPIs for our promotional code.
We have decided to create two discount codes to capitalise on the expected surge in website traffic during December’s holiday season. One aims to increase the conversion rate, while the other focuses on raising the average order value.
Based on an analysis of our historical e-commerce data, we find that:
The formulas to calculate revenue and gross margin are as follows (assuming the discount code is applied to every purchase):
Gross Margin = Traffic × Conversion Rate x Average Order Value x (Gross Margin Rate – Discount rate)
Without any promotions, we expect the following performance in December:
Revenue = 400.000 × 4% x €50 = €800.000
Gross Margin = 400.000 × 4% x €50 x 50% = €400.000
The next steps involve analysing objectives on how discount codes can increase the conversion rate and the average order value.
First objective: increase the conversion rate
We measure the effectiveness of our first discount code based on the conversion rate and incremental margin. The incremental margin helps ensure that our ROI remains positive.
The impact of a discount code on the conversion rate depends on its value. By analysing past campaign data, we establish the following relationship between discount percentage and conversion rate:
(Reminder: we assume that the promo code is applied to each purchase).
Using the earlier mentioned formulas, we estimate the following impact on our gross margin:
Our estimates suggest that a 20% discount provides the best ROI. Higher discounts result in a decreasing incremental margin and, consequently, lower ROI.
Note: It may still be interesting to go beyond a 20% discount if the goal is not to increase revenue but to clear stock quickly, for example (a typical case for end-of-season sales).
Second objective: increasing the average order value
This time, we evaluate the discount code’s effectiveness based on the average order value and incremental margin. Again, monitoring incremental margin ensures a positive ROI.
We opt for a promotion in the form of €X off when spending €X. Considering our 50% gross margin, we estimate the impact on revenue and gross margin per individual sale as follows:
This table provides insight into the impact of the selected offer on gross margin and identifies the threshold beyond which the offer results in a loss of gross margin. However, it does not indicate the average order value when the offer is applied.
For instance, while a €5 discount on purchases over €100 secures the highest gross margin (€45), its effect on the average order value will be less pronounced than a €20 discount on purchases over €100, which results in a lower gross margin (€30).
The next step is to estimate the proportion of buyers who will be encouraged by the offer to increase their basket value to meet the new threshold. This proportion tends to decrease as the threshold increases and increase as the discount becomes more attractive. By factoring in historical e-commerce data, we can estimate the final impact on both the average order value and the average gross margin per sale:
Based on this data, we determine that the best combination to increase the average order value while maintaining the highest gross margin is a €15 discount on purchases of €100 or more. The new average order value becomes €57, and the gross margin per sale is €27 (47.37%).
Our KPIs are:
Note: In this case, we observe that the ROI (Return on Investment) is significantly lower compared to our first example, making this type of discount less effective when the primary goal is to maximise profit margins. However, this strategy becomes highly valuable when the main objective is to clear out stock quickly rather than to maintain a high margin rate. If ROI is no longer a priority and a negative ROI is acceptable, then an even more aggressive offer, such as €25 off for purchases over €100, would be even more relevant, as it would further incentivise purchases and accelerate stock clearance.
Conclusion
Discount codes are powerful tools to enhance e-commerce performance, but their effectiveness depends on thoughtful planning and integration into a broader strategy. By following the three golden rules—easy to remember, calculate, and apply—and aligning offers with specific goals such as increasing conversion rate or average order value, you can maximise their impact.
Additionally, measuring the effectiveness of discount codes through relevant KPIs such as ROI, incremental margin, and revenue is essential. A data-driven approach allows you to tailor promotions to your audience’s expectations while maintaining e-commerce profitability.
Ultimately, discount codes should always align with your business goals—whether increasing visibility, clearing stock, or strengthening customer loyalty. A well-planned discount code strategy can drive customer satisfaction and sustainable growth. The choice is yours!