Coupons vs Loyalty Programs: Which Protects Your Margins Better?
Jan 2, 2025
You're running discounts. 20% off weekends. "First-time customer" coupons. Seasonal sales. Social media promotions.
It's working — kind of. You're getting customers through the door. But you're also watching your margins shrink. Every discount costs you real money, and you're starting to wonder: Is there a better way to drive business without constantly cutting into profits?
Here's what you need to understand: Coupons and loyalty programs aren't competing strategies. They're tools for completely different jobs. Coupons buy one-time transactions. Loyalty programs build repeat customers.
One gives away margin to attract strangers. The other rewards behavior you already want from people who already know you.
The problem isn't discounting. The problem is using the wrong tool at the wrong time — and watching profits disappear as a result.
This guide explains what coupons actually accomplish (and cost), what loyalty programs deliver instead, the margin math that makes the difference, when each tool makes sense, and how they work together without destroying profitability.
By the end, you'll know exactly how to stop bleeding margin while still driving the customer behavior you need.
What Coupons Actually Do (And Cost)
Let's start with reality.
Coupons: The Acquisition Tool
What coupons are:
Temporary discounts offered to drive immediate purchases. Usually broadcast publicly:
"20% off this weekend"
"New customer special: £10 off first purchase"
"Summer sale: Buy one, get one 50% off"
"Show this coupon for 15% off"
Who uses them:
Everyone. Your customers. Their customers. People who've never heard of you. Bargain hunters. People who wouldn't pay full price.
What they accomplish:
Attract new customers who might not try you otherwise
Drive volume during slow periods
Clear out excess inventory
Create urgency ("Limited time!")
Generate social media engagement
What they don't do:
Build relationships
Create loyalty
Ensure repeat visits
Distinguish between good customers and bargain hunters
Generate long-term value
The Margin Math: What Coupons Actually Cost
Let's use real numbers.
Your business:
Average sale: £30
Gross margin: 60% (£18 profit per sale)
Fixed costs covered by ~15 sales per day
Scenario 1: Full price (no coupon)
Sale: £30
Profit: £18
Margin: 60%
Scenario 2: 20% off coupon
Sale: £24 (£30 - £6 discount)
Costs: £12 (unchanged)
Profit: £12
Margin: 50%
You just gave away 33% of your profit (from £18 to £12) to get this sale.
Scenario 3: Customer who would have paid full price uses coupon
This is the killer. If 40% of coupon users would have bought anyway:
You got the sale you were getting anyway
You gave away £6 for nothing
Pure margin loss: £6 per transaction
If 10 of your 30 daily customers use coupons they didn't need:
Daily loss: £60
Weekly loss: £420
Annual loss: £21,840
You're literally paying people to do what they were already doing.
The Coupon Trap
What happens over time:
Month 1: You run "20% off" promotion. It works. Sales spike.
Month 2: Sales return to normal. You think: "Let's do it again."
Month 3: Sales spike again. But some customers wait for promotions.
Month 4: You're running promotions constantly to maintain volume.
Month 6: Customers expect discounts. Full-price sales decline.
Month 12: You're stuck. Stop discounting and volume drops. Keep discounting and margins disappear.
You've trained customers to never pay full price.
Who Benefits Most From Your Coupons
Bargain hunters:
Use coupon
Buy once
Never return (unless you run another coupon)
Lifetime value: One discounted transaction
Price-sensitive customers:
Only buy when discounted
Switch to competitors who offer better deals
No loyalty
Lifetime value: Occasional discounted transactions
Your existing customers:
Would have paid full price
Use coupon because it's available
You gave away margin for zero incremental benefit
Coupons attract the customers you least want and subsidize the customers you already have.
What Loyalty Programs Actually Do (And Deliver)
Now let's understand the alternative.
Loyalty Programs: The Retention Tool
What loyalty programs are:
Structured rewards for repeat behavior. Earned through actions, not available to everyone:
"Buy 9 coffees, get 10th free"
"Earn 1 point per £1 spent, 100 points = £5 off"
"Visit 5 times, get 20% off next visit"
"VIP members get 10% off everything"
Who gets them:
Your customers. People who've already bought from you. People who come back. Regulars.
What they accomplish:
Reward repeat customers (not one-timers)
Encourage frequent visits (must return to earn)
Build habits (customers track progress)
Create emotional connection (feeling of progress)
Identify your best customers (data on who returns)
What they don't do:
Attract bargain hunters
Give discounts to people who weren't coming back anyway
Erode margin on every transaction
Train customers to wait for sales
The Margin Math: What Loyalty Programs Cost
Using the same business:
Average sale: £30
Gross margin: 60% (£18 profit)
Loyalty structure: "Buy 9, get 10th free"
Customer journey:
Visit 1: Pays £30, earns 1 stamp (profit: £18)
Visit 2: Pays £30, earns 1 stamp (profit: £18)
Visit 3–9: Pays £30 each (profit: £18 × 7 = £126)
Visit 10: Free (cost: £12, profit: -£12)
Total over 10 visits:
Revenue: £270 (9 × £30)
Profit: £150 (9 × £18 - £12)
Effective margin: 55.6% That 55.6% effective margin is dramatically better than the 50% you'd get from couponing — and when you factor in breakage and increased visit frequency, loyalty program profitability often returns 10–20x the monthly cost of running the program. (only slightly lower than 60%)
Compare to coupons:
If you gave 20% off to attract these same 10 visits:
Revenue: £240 (10 × £24)
Profit: £120 (10 × £12)
Effective margin: 50%
Loyalty programs preserve 5–10% more margin than blanket discounts while driving the same behavior.
Why Loyalty Programs Cost Less
Reason 1: Delayed gratification
Coupons give discount immediately. Loyalty programs give rewards after multiple visits.
Impact: Customer must return 9 times before getting anything free. You've collected 9 full-price transactions before giving one reward.
Reason 2: Only rewards repeat customers
Coupons reward everyone (including one-timers). Loyalty rewards only people who come back.
Impact: You're not subsidizing bargain hunters. You're rewarding valuable customers. Reason 4: Soft benefits cost nothing Beyond stamps and discounts, loyalty programs let you offer hard and soft loyalty benefits — priority booking, early access, personal recognition — that increase perceived value without touching your margin at all.
Reason 3: Not everyone redeems
20–30% of earned loyalty rewards never get redeemed (forgotten, moved away, lost interest).
Impact: Your actual cost is 20–30% lower than stated value.
Reason 4: Drives incremental visits
Customers at 7 stamps think: "I should go back soon to finish my card."
Impact: Loyalty programs pull forward visits you wouldn't have gotten. Coupons just discount visits you were getting anyway.
The Strategic Difference: Acquisition vs Retention
Here's the core distinction.
Coupons = Acquisition Strategy
Purpose: Get new customers to try you
Target audience: People who don't know you or haven't tried you
Mechanism: Reduce risk/price barrier for first-time trial
Success metric: How many new customers try you
Best use: Launching new business, entering new market, introducing new product
Margin trade-off: Worth it if you convert trial customers to regulars
Loyalty = Retention Strategy
Purpose: Get existing customers to return more often
Target audience: People who already tried you and liked you
Mechanism: Reward repeat behavior you want to encourage
Success metric: How often customers return and lifetime value
Best use: Ongoing, always active for all customers
Margin trade-off: Minimal because you're rewarding behavior that already happens
The Mistake: Using Coupons for Retention
What businesses do:
Run "20% off" coupons to get existing customers to come back.
What actually happens:
Existing customers use coupons they didn't need
You give away margin on sales you were getting anyway
Customers learn to wait for coupons before visiting
You've turned retention problem into margin problem
What they should do:
Use loyalty programs for retention. Reward 10th visit instead of discounting 1st–10th visits.
When Each Tool Makes Sense
Let's get practical.
Use Coupons When:
✓ Launching or entering a market
If you're new and unknown, coupons reduce risk for first-time customers. Worth the margin hit to get trial.
✓ You have slow periods to fill
If Tuesday afternoons are dead, "20% off Tuesdays 2–4pm" fills seats during otherwise zero revenue hours.
✓ You need to clear inventory
If you have excess stock or perishables approaching expiration, discounting beats throwing away. In each of these cases, the key is treating the discount as a calculated investment with a defined end date — understanding exactly when free promotions make business sense prevents a one-off tactic from becoming a permanent margin drain.
✓ You're competing against an event/competitor
If major competitor opens next door or big event diverts traffic, tactical coupon can defend share.
✓ You're targeting new customer segments
If you want corporate clients to try your café for meetings, "First corporate order 15% off" makes sense.
Don't Use Coupons For:
✗ Getting existing customers to return
Use loyalty programs instead. Cheaper and more effective.
✗ Ongoing promotions (always discounting)
This trains customers to never pay full price. Margin death spiral.
✗ Competing on price
If your only differentiator is "cheapest," you'll be undercut by someone willing to lose more money.
Use Loyalty Programs When:
✓ You have repeat-purchase business model
If customers visit weekly, monthly, or irregularly but can return, loyalty drives frequency.
✓ You want to reward best customers
Top 20% of customers drive 80% of revenue. Loyalty identifies and rewards them.
✓ You want predictable, sustainable growth
Loyalty compounds over time as customer habits form. The critical variable is choosing the right loyalty reward — too generous and you erode the margin advantage over coupons; too stingy and customers never bother completing the card.
✓ You're in competitive market
Loyalty creates switching costs. Customers with 7 stamps don't want to start over elsewhere.
✓ You want data on customer behavior
Loyalty programs track who visits, how often, what they spend. Coupons are anonymous.
Don't Use Loyalty For:
✗ Attracting completely new customers
Strangers don't care about earning stamps. They need reason to try you first.
✗ One-time purchase businesses
If customers realistically only buy once (wedding services, moving companies), loyalty makes no sense.
How Coupons and Loyalty Work Together
The best approach? Use both strategically.
The Integrated Strategy
Phase 1: Acquisition (Coupons)
New customer sees coupon: "First visit: 20% off"
Customer tries your business
You take margin hit to acquire customer
Goal: Get trial
Phase 2: Conversion (Onboarding)
During first visit, customer joins loyalty program:
Scans QR code, adds digital loyalty card to wallet
Gets first stamp/points immediately
Sees: "9 more visits and you earn a free item"
Goal: Convert trial customer to loyalty member This conversion step is where most businesses fumble — if you don't have a clear system to get customers to join your loyalty program during that first visit, you've paid the coupon cost without capturing any long-term value.
Phase 3: Retention (Loyalty)
Customer returns because they're progressing toward reward:
Visit 2: Full price, earns stamp (profit: £18 This exact phased approach is why loyalty programs for restaurants consistently outperform blanket discount campaigns — a diner who earns their way to a free dessert over five visits generates far more profit than one who walks in with a 20% off voucher and never returns.)
Visit 3: Full price, earns stamp (profit: £18)
Visits 4–9: Full price each (profit: £108)
Visit 10: Free item (cost: £12)
Total profit over 10 visits: £132 (9 × £18 - £12 coupon - £12 free item)
If you'd used coupons for all 10 visits:
Total profit: £108 (9 × £12 discounted) - £12 first visit coupon = £96
Loyalty approach saved you £36 per customer (37% more profitable)
The Hybrid Model in Practice
Example: Coffee shop
Acquisition (coupons):
Instagram ad: "First coffee free with this coupon"
Local flyer: "Try us — first visit 50% off"
Corporate outreach: "First office order 20% off"
Conversion (onboarding):
When new customer visits, staff say: "Thanks for trying us! Join our digital stamp card — your free coffee today counts as your first stamp."
Customer scans QR code, adds wallet card
Gets first stamp despite paying nothing (generous onboarding)
Retention (loyalty):
Customer returns for visit 2 (full price, earns stamp)
Push notification after 2 weeks: "You have 3 stamps — 7 more for free coffee!"
Customer returns regularly (full price)
Visit 10: Redeems free coffee
Economics:
Visit 1: Lost £3 (cost of free coffee) to acquire customer
Visits 2–9: £18 profit × 8 = £144
Visit 10: Lost £3 (free coffee reward)
Net profit: £138 over 10 visits
If you'd used coupons every visit instead:
10 visits × £12 profit (discounted) = £120
Net profit: £120
Loyalty approach: 15% more profitable
Real-World Example: A Barbershop in Glasgow
Let's see this play out.
The business: Traditional barbershop in Glasgow. 2 barbers. Haircut: £28. Gross margin: 75% (£21 profit).
Year 1: Coupon-Driven Strategy
Owner's thinking:
"Competition is tough. Other barbershops nearby. I need to attract customers with deals."
Promotions run:
"First haircut: £20" (£8 off)
"Bring a friend, both get 20% off"
Monthly Facebook posts: "This week only: £22 haircuts"
"Student discount: 15% off"
Month 3 results (typical):
120 haircuts
35 used coupons (29%)
Revenue: (85 × £28) + (35 × £22-24 average) = £2,380 + £805 = £3,185
Profit: (85 × £21) + (35 × £16-18 average) = £1,785 + £595 = £2,380
Year 1 results:
Total revenue: £38,220
Total profit: £28,560
Margin: 74.7% (slightly below 75% due to discounts)
Owner's observations:
"Coupons bring people in, but I notice: (1) Some customers wait for promotions before booking, (2) Students use discount every time — they expect it, (3) I'm discounting people who were coming anyway, (4) One-time coupon users never return even after discount."
Year 2: Loyalty-Driven Strategy (Perkstar)
Owner's pivot:
"I'm going to stop most coupons and focus on rewarding regulars."
New approach:
Loyalty program (Perkstar):
Digital stamp card: "5 haircuts, 6th at 50% off"
Every customer offered enrollment: "Join our digital stamp card — no more lost paper cards"
142 customers enrolled (89% of regulars)
Limited strategic coupons:
Kept "First haircut £20" for genuinely new customers only (tracked to prevent repeat use)
Removed all other coupons
Month 3 results (typical):
125 haircuts (volume up slightly — loyalty drove frequency)
8 new customers used first-visit coupon
117 paid full price
18 redeemed loyalty reward (6th visit at 50% off = £14)
Breakdown:
8 new customers: £20 each = £160 (profit: 8 × £13 = £104)
99 full-price regulars: £28 each = £2,772 (profit: 99 × £21 = £2,079)
18 loyalty redemptions: £14 each = £252 (profit: 18 × £7 = £126)
Total revenue: £3,184 (about same as Year 1)
Total profit: £2,309
Wait — that looks lower?
But let's look at the full picture over 6 visits per customer:
Year 1 approach (if customer used coupons):
6 visits × £22 average (discounted) = £132 revenue
6 visits × £16 profit = £96 profit
Year 2 approach (loyalty):
Visits 1–5: £28 each = £140 revenue (profit: £105)
Visit 6: £14 (50% off reward) = revenue £14 (profit: £7)
Total over 6 visits: £154 revenue, £112 profit
Loyalty approach: 17% more profitable per customer
Year 2 annual results:
Total revenue: £38,208 (virtually identical)
Total profit: £27,696 (accounting for loyalty rewards)
Margin: 72.5%
But the real difference:
Customer behavior changed:
Visit frequency increased 12% (customers motivated to complete cards)
New customer retention improved (enrolled in loyalty immediately)
No more customers waiting for sales (steady visit patterns)
Referrals up (customers told friends about stamp cards)
Owner's reflection:
"I'm making slightly less profit per transaction but customers come more often. Over time, loyalty customers are worth more. And I'm not training people to expect discounts constantly. My margins are healthier and my revenue is more predictable. Best decision I made."
Modern Take: Why Loyalty Wins in 2026
Here's why this matters more now than ever.
Change 1: Discount Fatigue
2010–2015: Customers responded to discount emails. 20% off felt special.
2026: Everyone runs discounts constantly. 20% off is expected, not exciting.
Result: Coupons no longer differentiate you. They just train customers to wait for sales.
Change 2: Margin Pressure Intensified
2010–2015: Decent margins could absorb discount strategies.
2026: Costs up 30–40% (labor, rent, supplies). Margins tighter. Discounting is dangerous.
Result: You literally can't afford to give away 20% as casually as you used to.
Change 3: Competition Commoditized Services
2010–2015: Fewer competitors. Quality differentiated you.
2026: 5–10 businesses offering similar services within 2 miles.
Result: Loyalty creates switching costs. Customers with 7 stamps don't start over at competitor.
Change 4: Customer Acquisition Costs Skyrocketed
2010–2015: Acquire new customer for £5–10 (Facebook ads were cheap).
2026: Acquire new customer for £30–100 (ad costs up 5–10x).
Result: Can't afford to constantly chase new customers. Must retain the ones you have.
Change 5: Wallet Technology Democratized Loyalty
2010–2015: Digital loyalty required £10,000+ custom development or expensive platforms.
2026: Digital loyalty costs £15–£60/month (wallet-based cards, push notifications, automation). Modern loyalty card systems for small businesses now deliver wallet-based cards, automated push notifications, and customer analytics for a fraction of what custom development cost a decade ago.
Result: Small businesses can now run enterprise-quality loyalty at affordable prices. No excuse not to.
Final Thoughts: Stop Discounting Everyone, Start Rewarding Regulars
Coupons and loyalty programs aren't enemies. They're tools for different jobs.
Use coupons for:
Acquiring new customers (calculated margin hit for trial)
Filling genuinely empty capacity (better than zero revenue)
Tactical competitive defense (when necessary)
Use loyalty for:
Retaining existing customers (they already know you)
Driving visit frequency (habit formation)
Identifying best customers (data and targeting)
Protecting margins (reward 10th visit, not 1st–10th)
The integrated approach:
Acquire with coupons (strategically, not constantly)
Convert to loyalty immediately (onboard during first visit)
Retain with rewards (earned through behavior, not given away)
Stop giving 20% off to everyone. Start giving earned rewards to regulars.
Your margins will thank you. Your best customers will appreciate you. Your business will be more profitable and sustainable.
Start your free 14-day trial with Perkstar — no credit card required. Set up wallet-based loyalty that rewards repeat customers without constantly discounting. Protect your margins while building valuable long-term relationships.
Your regulars deserve rewards. Strangers don't deserve discounts.
