Discounting is a ubiquitous sales strategy among most retailers. Consumers who have grown accustomed to digital and print coupons, constant sales, and clear-the-racks discounts are constantly searching for the best deals. So it’s not surprising that retailers use pricing strategies and analytics to constantly fine-tune offers for greater sales, faster product turns, and higher ROI.
What is surprising is that offering too large a discount can actually have a deleterious effect, leading to lower consumer spending, longer sales cycles, and negative brand perception. A new study from the Journal of Marketing explores the subtle art of discounting with product-line coupons. Product-line coupons are coupons that can be used on different products at different prices within a brand, thus providing customers with quite a bit of flexibility. For instance, consumers may get a $50-off coupon with which they can enjoy a price discount on any Dell laptop computer. In another scenario, consumers may receive an unrestricted $10-off coupon from a restaurant that can be applied to any combination of dishes and drinks. Therefore, with product-line coupons, consumers aren’t evaluating the merits of an individual product alone, but are considering the tradeoffs between buying different low- and high-dollar products, such as a basic versus an advanced version of a laptop at an electronics store or a burger versus a combo meal at a restaurant. However, product-line coupons have not been studied intensively like product-specific coupons, a gap our team sought to remedy.
We conducted our study using one field data set and executing four lab experiments with diverse populations, hedonic and utilitarian products (such as restaurant food and chocolate versus mobile hard drives), and known and niche brands. What we found may surprise you.
With a product-line coupon, the consumer must decide not only whether to use the coupon, but also which specific product to purchase. The additional step of choosing the product can activate two opposing forces in the spending decision. When consumers spend, they have a mental budget that can increase with couponing, thus motivating them to buy a higher-priced option. Thus, the common intuition is that larger discounts lead to an increase in the mental budget and therefore higher spending levels. However, research also shows that consumers evaluate discounts and base their spending decisions on the savings percentage associated with the discount. For a given discount amount, a lower-priced product will have a larger and more attractive savings percentage than a higher-priced option. This savings-comparison mechanism is responsible for the lower spending levels. Our study examines how the value of a product-line discount itself determines whether either of these two mechanisms would be more prevalent.
Our findings indicate that the intuition that larger discounts should drive more sales does not always hold. Specifically, we found that product-line discounts have an inverted U-shaped effect on sales, meaning that low and high discounts lower consumer spending and moderate discounts produce the highest consumer spending under five conditions. In each of these five conditions, consumers shift from a mental budget mindset to a savings-comparison mindset when product-line discounts increase from a low amount to a high amount.
Larger product-line discounts can result in lower sales:
- When products are expensive because spending larger amounts leads people to be aware of prices and how to potentially save money.
- When consumers have a strong savings orientation (i.e., agreement with statements such as “I am willing to wait on a purchase I want so that I can save money”). This savings mindset leads consumers to minimize product acquisition costs and choose a lower-priced product with a larger savings percentage.
- When consumers have a high tendency to compare options thoroughly in their decision process. These consumers naturally exert the extra mental energy required to compute and compare savings percentages.
- When consumers experience a low information load from processing a small number of products. This is because they are not fatigued with product and savings analysis and hence have the energy to make the savings percentage comparisons.
- When consumers have a weak preexisting preference for a specific level of product benefit. These consumers are less committed to specific product features or benefits and are more susceptible to the influence of coupons.
Marketers can use our research to design product-line promotions and coupons to make it easier for consumers to spend more and avoid unintended consequences with discounting. The differences observed for consumers with tendencies to save and compare may also indicate the need to use discount levels that work best for these types of consumers, who could be identified based on past purchase behaviors or other online and offline behaviors.
Since retail is an industry with sky-high customer expectations and razor-thin margins, our findings should support retailers offering moderate product-line discounts under the five conditions we observe. This will boost sales and sidestep any negative effects that discounting might have on consumers’ perceptions of the brand.
From: He (Michael) Jia, Sha Yang, Xianghua Lu, and C. Whan Park, “Do Consumers Always Spend More When Coupon Face Value Is Larger? The Inverted U-Shaped Effect of Coupon Face Value on Consumer Spending Level,” Journal of Marketing, 82 (July), 70-85.