DTC Briefing: How promo code leaks are impacting profit margins

But now, many DTC brands also use promo codes to track the effectiveness of certain marketing programs. For example, they might give each influencer they work with a unique promotional code to offer a 10% or 20% discount to their followers. But every new promo code creates a risk for that brand that the promo code will eventually leak through plug-ins like Honey, Retail Me Not and Capital One Shopping, where more shoppers might use the promo code than the brand initially intended. Despite the emergence of some software providers that scan the web for leaked codes, brand founders say there is still no good way to stop promo codes from leaking. In turn, it’s yet another added cost for founders to deal with at a time when their margins are already being squeezed by inflation.

Steph Chen, the founder of microwave cookware brand Anyday, told me that leaked promo codes have become so incessant that this unintentional discounting is eating into the order margins. “It probably had been happening since the beginning [of the company], but we got wise to it late,” she said. But the problem has only gotten worse in the last few months, hindering the company’s marketing strategy.

Chen said even with limiting the number of codes that can be used through Shopify’s backend, promo codes still get picked up by Honey’s extension. “We just have a recurring reminder to check on them, but we can’t precisely track where they’re coming from,” Chen said.

Typically, when the revenue coming from a unique code sees a sudden spike, the company finds it on Honey or other couponing sites. “Sometimes there is a gut feeling that this is too much revenue to be driving on that day,” Chen added. At the moment, she said, Shopify doesn’t have its own solution for automatically blocking these codes from being redeemed at checkout.

Chen said that promo codes are one of the most useful ways to track the effectiveness of a certain marketing channel. They are helpful for podcast ads, for example, because it’s not like a brand can include a link for listeners to easily click on in an audio ad.

In some cases, the company uses a workaround by creating exclusive links that redirect to its website, instead of a coupon name to enter at checkout. “Once we catch them, there is not an easy way to switch them out and it’s a frustrating process for both the consumer and affiliate partner,” Chen said. For example, a podcast host would have to re-record the ad with a new unique code. 

But that’s not always a solution. Recently, an exclusive Anyday promo code that was created in partnership with Panasonic to promote the appliance company’s new microwave was leaked. Each microwave comes with an Anyday booklet and an exclusive 15% discount. “That’s a printed code that we can’t take back or change.” 

Right now, Chen said paying a vendor — which she notes is almost all pretty expensive — doesn’t make sense. But it’s something she may consider if Anyday invests more in influencers, podcasts or direct mail to be able to catch leaks in real-time. “But we’re reluctant to deal with the mental load of leaks.” 

Other promising tech startups that hoped to help startups solve this issue have run into hurdles. Dennis Hegstad launched Vigilance, a discount code-scanning app built for Shopify in 2023. But he shut down Vigilance last year after a Shopify update made his solution incompatible with Shopify’s checkout.

In February 2023, shortly after Vigilance launched, Shopify announced that its checkout.liquid theme file was being deprecated. Hegstad said that as a result, the update doesn’t allow for checkout customizations through Shopify Plus apps like Vigilance, and thus “coupon injection attribution or blocking is no longer possible on Shopify’s checkout.”

Hegstad said it’s not surprising smaller brands are still struggling with code leaks since Shopify hasn’t found a solution internally. While he understands that Shopify’s new sandbox-like policy is meant to make checkout more secure, Hegstad said, “It’s a bummer to say we can’t help because the platform doesn’t allow us to.” The best current solution for brands on Shopify is to delete a promo code on the backend. But, that means that it won’t work at all anymore, versus keeping the code around and ensuring it’s only being used by the intended customer base.

There are some other platforms that cater to cleaning the web of promo codes. One of the major ones is Clean.io’s, whose CleanCART suite helps prevent extensions like Honey and CapitalOne Shopping from automatically applying coupons into checkout pages. Currently, merchants can install CleanCart on Shopify and BigCommerce. 

Why the leaks matter
Chen said that getting a bump in sales is perceived as a good thing, but getting them through leaks has multiple implications. According to Chen, if a customer checks out through a leaked code instead of signing up for Anyday’s email newsletter to get the 10% off, they don’t always opt into email communications. “A conversion from a leaked code is worth significantly less to us in the long run than a conversion through signing up for our email,” Chen said.

“You’re also paying the partner or influencer out because of the discount referral,” Chen said. “So it’s a double whammy hit on margins.” 

Other brands are affected by promo code leaks in other ways. For its affiliate program, P.F. Candle Co. uses unique links that first-time shoppers have to directly click on to receive the discount. But when these links are leaked to couponing sites, the affiliate partner can miss out on their commission. 

However, founder Kristen Pumphrey said how the company gets around this is by partnering directly with Honey, in which the brand pays a commission to Honey for each sale that comes in through the web extension. “That gives us a little bit more control over the discount codes there,” Pumphrey said. After seeing a lot of new customers coming from Honey’s extension, she said the brand decided to work with Honey directly to at least be able to better track these conversions. This way, Honey is considered an affiliate partner.

If something leaks, the company can get it taken down quicker because it has a brand rep. “But if something’s on RetailMeNot, it’s really hard to get it scrubbed from there,” she said, since the brand doesn’t work directly with that site.

Still, Pumphrey said the company is seeing a gradual increase in discount code use on the P.F. Candle Co. site, versus other couponing sites. This year, the percentage of P.F. Candle’s annual sales coming from promo codes and other promotional discounts is up 22% compared to 2023. While this also covers all discounts given to new customers, Pumphrey said, “seeing that increase, we know consumers are looking out for those codes.”  

For the most part, Pumphrey said she considers these code redemptions as part of the cost of doing business. “When we’re worried is when we see abuse of a code,” Pumphrey said.

Chen said promo leaks are part of an ongoing problem of customers expecting constant deals for any time they shop. It’s a pattern the company is trying to move away from to improve margins. “It’s a big hit to take, especially right now when every margin point is so important to P&L,” Chen said.  

What I’m reading 

• Peloton layoffs start as CEO Barry McCarthy steps down, with the company set to cut 15% of staff.
• After launching a grocery line last year, Daily Harvest is expanding its retail footprint by entering Target.
• This week, celebrity couple John Legend and Chrissy Teigen launched a high-end pet food brand called Kismet.

What we’ve covered 

• Golf apparel brand Honors is holding trunk shows to attract women golfers with its pieces on-site.
• Resale startup Rebag launched a new membership program that encourages customers to save for a new handbag. 
• Beach bag brand Aloha Collection is targeting coastal communities with store expansion.