Thinking About Ads, Coupons, Taxes and Tariffs

I think I was in high school when someone first explained the economics of running ads versus offering coupons to me. Either way, it was way late in life to be first encountering this logic, but it’s worth revisiting (for the kids of course).

This logic represents some of the most basic building blocks we all need to be adults in this world. If we can understand ads vs. coupons, then we can tackle other concepts like taxes vs. tariffs too. Seriously.

Now, we’re going to ignore a ton of variables, so suspend your disbelief (or your MBA) and focus on the following:

A store has a 100 doodads it wants to sell for $1 each. The problem is, there are no customers.

They decide to advertise with a poster that costs $10. The doodads all sell and they take in $90, which they determine is good enough. In the end, they’ve kept $0.90 per doodad. Ads are a cost to the business and convey some information to the consumer (“come on down to the premier provider of doodads!”).

Alternately, the store could offer coupons to random people on the street for $0.10 off each doodad, earning them $0.90 each or $90 in total if they all sell. The coupons are also a cost to the business, but it is framed differently to the consumer (“present this golden ticket for a special deal!”).

The big takeaway is that the cost of acquisition can either go to some third party for advertising, OR it can go directly to the consumers as an incentive. Depending on the relationship and the psychology with/of the buyer, both tools can be really useful.

Now, what about taxes and tariffs?

Let’s say a government decides they need a cut of the red-hot doodad action, so they decide to levy a sales tax on each doodad of $0.10. If the store can pass the tax on to the consumer, the price gets bumped back up to $1, but the store still only gets $0.90. The store doesn’t front the money, but they do remit it to the government.

What if the government decided to put a $0.10 tariff on each doodad instead? Well, now the store is really in the middle. The tariff will push their cost up before the sale. They can still pass that cost onto the consumer, rendering their cost structure to be the same as the tax example, but the cost is up front instead of on the back end.

Advertisements, coupons, taxes, and tariffs all have similar impacts – they all reallocate money in a system for some purpose. Wherever there is purpose, there are incentives – and these are what we’re always looking for.

Ads can be used to find new customers or make existing customers feel good (availability creates familiarity which can create trust).

Coupons can be used to find price-sensitive shoppers or reward loyal customers with a deal. Coupons can serve as internal perks or rewards.

Taxes can reallocate money away from consumers and towards the government’s projects. They require someone/something to capture and pay them. The act of payment/remittance after the transaction to the end user matters.

Tariffs can reallocate money away from sellers of goods (or consumers if they mark the products up similar to a tax) and towards the government’s projects just like taxes. The act of charging them prior to receipt by the end user matters.

Mathematically, there are similar conclusions to reach. Psychologically and symbolically, they each send unique messages.