Why Do Coupons and Discount Codes Exist?

Why companies make customers work for discounts, and how coupons, cashback and promo codes sort price-sensitive buyers from everyone else.

Why don’t companies just lower prices for everyone instead of making people hunt for coupons, codes and cashback offers?

Sorting customers

Coupons are a form of price discrimination through self-selection. The company offers a discount, but only to those willing to put in effort:

Price-sensitive customers, who care a lot about saving money, take the time to find and use coupons.
Less price-sensitive customers, who value their time more, pay full price.

The company gets higher prices from those willing to pay them and lower prices for those who would otherwise not buy. Customers sort themselves.

Modern versions

Promo codes on shopping and food delivery apps.
Cashback offers that require claiming or using a certain payment method.
Rebates that require forms or waiting.
Loyalty points and app-only deals.
Bank card offers during sales.

Why effort matters

If the discount were automatic for everyone, the company would lose revenue from customers who would have paid full price. The effort acts as a filter.

With rebates, many customers never claim them. Research on rebates in the U.S. found that a large share of eligible customers never submitted claims, a phenomenon called breakage, which companies factor into pricing.

Other purposes

Attracting new customers to try a product.
Collecting data through app sign-ups.
Clearing old stock.
Encouraging habits: first-order discounts on apps aim to create repeat users.

Smart use

Use coupons for things you would buy anyway.
Beware of spending more to reach a minimum order for a discount.
Remember your time has value.

The food delivery code

A food delivery app offers 50 percent off with a code sent to users who have not ordered in a month. Regular users keep paying full price, while lapsed users are tempted back. The app keeps its average prices high while winning back price-sensitive customers.

Thinking a coupon always means you save money

Coupons can encourage spending on things you did not need or pushing a basket above a minimum. Saving only happens if you would have bought the item anyway.

Key takeaways

Coupons let companies offer discounts only to price-sensitive customers who make the effort.
This is price discrimination through self-selection.
Many rebates go unclaimed, which companies factor into pricing.
Use coupons only for things you would buy anyway.