Tag: discounts

The below post originally appeared on The Source.

Spend $200 on a great Christmas gift at the big box store and get a $50 gift card. Sounds like a great offer. It may, in fact, entice you to spend more than you normally would, warns an Olin Business School marketing expert.

Cynthia Cryder

“Price promotions that feel too good to be true are always an opportunity for consumers to take an extra moment for reflection,” said Cynthia Cryder, associate professor of marketing at Olin Business School. “Instead of thinking about how much money they are ‘saving,’ consumers might want to stop to ask themselves: How much am I actually paying for this product, and am I willing to pay that much?”

Cryder and co-author Andong Cheng, of the University of Delaware, examined the phenomenon of this “mental discounting” in a new paper, “Double Mental Discounting: When a Single Price Promotion Feels Twice as Nice,” accepted in the Journal of Marketing Research.

With certain price promotions, such as a receiving a gift card to spend in the future, consumers mentally deduct the gift card’s value from the initial purchase as well as from the second purchase when they use the gift card. Multiple mental deductions based on a single price promotion result in consumers’ perceptions that their costs feel lower than they actually are, and can increase spending, Cryder said.

“Consider a situation in which a college student purchases a $900 Macbook and receives a $100 gift card to spend in an Apple store in the future,” Cryder and Cheng wrote in the paper. “Feeling confident that she will use the gift card, the student may mentally reduce the laptop cost and think: ‘I am spending only $800 (instead of $900) on this laptop because I am receiving $100 worth of credit back in my pocket.’

“Now imagine that later, the student is back in the store purchasing a $300 iPad. At this point, she applies the $100 gift card, resulting in a final $200 charge for the iPad,” they wrote. “She may think: ‘I am spending only $200 (instead of $300) for this tablet, because my gift card covers some of the cost.’ In total, this consumer has paid $1100 for the laptop and tablet, yet, because she mentally applied the price promotion to both purchases, she may feel as if she paid substantially less.”

According to industry research, Cryder said, businesses will load $14.5 billion onto promotional credit offers in 2017, triple the amount from 10 years ago.

“These promotions create opportunities for retailers, and consumers should carefully consider these offers before taking advantage of them,” Cryder said. “Although consumers might feel like they are spending less, these offers can sometimes encourage them to spend more.”

By Neil Schoenherr, Washington University in St. Louis Public Affairs

Purchasing and pricing has always been a dance between buyers and sellers. Before deciding to make a purchase, buyers spend varying amounts of time and effort searching for price information. These searches can and do affect the pricing strategies of sellers: Where should they set their prices? Should they offer sales or discounts, or keep their product prices at a high margin?

New research from Olin Business School at Washington University in St. Louis presents a new framework that might make it a bit easier for businesses as they navigate the marketplace: it all boils down to understanding the buyer’s search.

Prof. Tat Chan

Prof. Tat Chan

Tat Chan, associate professor of marketing at Olin, along with co-authors Xing Zhang, assistant professor of marketing at Fudan University and Ying Xie, associate professor of marketing at the University of Texas at Dallas, used an empirical approach for their research, recently accepted at Management Science.

The researchers examined a business-to-business market, where supply firms sell materials to buying firms, and buying firms need to search for price when purchasing to determine which selling firm will offer the best price in order to buy cheaper.

“We studied whether it’s optimal for the selling firms to have periodic price discounts when they sell to the buying firms,” Chan said.

The researchers developed their pricing strategy model by analyzing data from an independent distributor that sells chemical lab supplies. The distributor provided 5-1/2 years of data on daily selling prices and sales quantities for a homogenous product called d-luciferin potassium salt.

The compound is sold by many firms, and there is no brand or quality difference. It also has a limited shelf life, so firms with inventory space can’t “stock up” for a better price or when prices drop.

“We chose this product because it needs to be used quickly, so there’s no inventory advantage for buyers,” Chan said. “But we found it’s still good for the company to offer a periodic price discount.”

By offering periodic price discounts, the researchers found firms can cast wider nets and reach different customer bases: the ones who are willing to buy at a higher price to save time, and those who are willing to take the time to bargain hunt in order to find the best deal.

“Some firms may search for price more intensively, looking at many, many companies,” Chan said. “Some companies don’t have that much time, they just know one supplier and buy from them only. Therefore, when you offer periodic price discounts you can sell to different kinds of buying firms.”

Although the research dealt with business-to-business transactions, Chan said there are takeaways for retailers as well. The ability to determine an optimal price promotion schedule, while taking into account expected competitive reactions, is of huge importance to retailers.

Knowing which customers have high search costs (with less time or inclination to compare prices), and which have low search costs (with more time to compare prices) can be used to put together a plan for setting discounts, ultimately allowing retailers to better compete in the marketplace.

“Our model gives a promotion schedule, how often a business should run a price promotion and how deep it can be,” Chan said. “It is critical that businesses look at the data and see how consumers are searching for prices.”

Chan is available for interviews and may be reached at chan@wustl.edu.

Image: Flickr Creative Commons, thinkpublic, Discounts Today

Bear Discounts, run by Olin students Josh Katz, Abhi Kumar, and Scott Nelson (all BSBA’17), is part of WashU’s Student Entrepreneurial Program (StEP). Bear Discounts cards provide WashU students, faculty, and staff discounts from nearly 60 local business partners. Cards are regularly $25 but are on sale for $10 through the end of August. Order here.

1. What Is Bear Discounts?

Bear discount logoThe Bear Discounts Card provides WashU students and staff discounts at a plethora of restaurants, stores, attractions, services and more. Contact info:  beardiscounts@gmail.com, or tweet @BearDiscounts.

2. Who Should Buy The Bear Discounts Card?

Every student and staff member of the Washington University community should use the Bear Discounts Card to take advantage of our incredible variety of discounts. If you like saving money, the Bear Discounts Card is for you!

3. Where Is The Card Accepted?

Many area merchants are willing to offer excellent deals to help draw coveted WashU traffic to their business. Domino’s pizza offers a free medium pizza with the purchase of a large or extra-large pizza. St. Louis America Cab Company offers a great flat $25 rate to the airport from campus (this fare can usually run about $35). There are many, many more discounts, click here to see a full list!

4. How Does The Bear Discounts Card Work?

For a 1-time fee the cardholder gets access to all discounts for an entire year. The Bear Discounts Card can be used an unlimited amount of times throughout the entire school year. Cards expire each August.