An age-old question answered
For as long as I’ve been in retail marketing (37 years), the question: “Does a specified dollar amount or a percent discount work best?” has remained a mystery.
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As a result of their ability to increase sales in the short run, drycleaners are
offering more and deeper price discounts to consumers than ever before.
Although offering deep price promotions increases customer counts at the time
of the promotion, such discounts may come with a downside, because they can
reduce post-promotion patronage.
One reason for a negative effect on future sales is that customers may lower
their expectations of the true value of your product, which in turn may
threaten future patronage when prices return to normal levels.
In this research, the authors examine how the promotion is presented
(percentage-off versus a specific dollar amount) changes the effect of the
promotion on future sales.
Price promotions may undermine future sales not only by lowering customers’ perceptions of the value of your services, but also by training them to wait
for promotions and by lowering customers’ expectations of the regular price of your service.
Deep promotions can be of particular concern. In an analysis of the effects of
promotion on post-promotion brand preference, researchers found that promotions
in excess of 20 percent of the product’s value may have a negative effect on post-promotion preference.
An attractive promotion scenario is one that increases patronage during the
promotion period but does not affect post-promotion price expectations, thus
not adversely affecting sales during the post-promotion periods.
Towards this end, researchers have identified several mechanisms that may cause
promotions to affect post-promotion sales. The primary factors being: how much
of a discount is being offered; and how the offer is phrased (either as a
percentage or a dollar amount).
Results of the study indicate that for promotions offering deep-discounts (e.g.,
greater than 40 percent), a dollar amount leads to lower sales volume, after
the promotion, than a percentage-off discount of equivalent value.
In addition to being associated with lower sales after the promotion, the
deep-discount percentage-off offer resulted in the same level of customer
response as the deep-discount dollars-off promotion.
They also found that the effects of how the offer was phrased, actually carried
over into sales after the promotion ended.
That is, customers were more likely to continue patronizing a store following
its use of a deep-discount promotion when the promotion offered a percentage as
opposed to a dollar amount discount.
However, for promotions offering low-discounts (15 percent or less),
post-promotional patronage was the same for dollar amounts and percentage-off
offers, alike.
Basically, they found that deep-discounts, offered as a percentage-off,
insulated companies from severe sales declines after the promotions. They
believe that the greater difficulty associated with processing a promotion that
is offered as a percentage-off rather than dollars-off, will minimize any
negative effect a promotion may have on post-promotion patronage.
Moreover, consumers seem to simply ignore price modifiers in some situations.
Other researchers have found that 23 percent of consumers do not even attempt to
compute the real price, whether a dollar amount or a percentage-off is used.
This implies that 77 percent of consumers do calculate or estimate the total
price.
How the discount is phrased affects the likelihood of a discount being
transformed into a revised price rather than just being estimated or ignored
altogether. When consumers are exposed to a promotion, the likelihood that they
will compute the new price is a function of the ease of calculating the price.
Calculating the new price resulting from a dollar-off promotion requires a
consumer to read the regular price, read the discount, and subtract the
discount from the regular price. Subtraction is a relatively easy task that
results in a high level of accuracy.
Given computation ease, consumers are likely to calculate the price associated
with a dollar-off discount and should be accurate in their calculations.
A percentage-off discount requires an additional processing step; the percentage
must be multiplied by the regular price to find the value of the discount.
Beyond requiring an additional step, the process required (multiplication) is
relatively difficult, which makes percentage-off discounts harder to calculate
than dollar-off discounts.
This difficulty makes consumers less likely to compute the revised price. In
turn, consumers may be uncertain of the resulting price because they do not
engage in the mental arithmetic needed to transform percentage-off discounts
into the true price.
It was also found that this effect disappears for percentage-off discounts that
are easy to compute.
For example, the authors did find this difficulty and/or failure to compute was
true for 40 percent off, but not for a 50 percent discount. The reasoning is
that the consumer merely needs to divide the regular price by two to determine
the 50 percent off price.
In summation: discounts of 15 percent or less work equally well when phrased as
either a percentage-off or dollars-off. That is, they are not particularly
effective during the promotional period but neither has an adverse effect on
post-promotional sales.
Deep discounts are better phrased as a percentage-off because the response,
while not significantly different during the promotional period from a dollar
amount discount, did not negatively impact post-promotion sales, as did
dollar-off deep discounts.
Discounts of 20 percent or less are not considered “deep discounts.” The researchers seemed to feel that 20 percent was the ideal offer, in that it
was sufficient enough to move customers to take action, while not detracting
from the value of the product or service being sold.
To me, this is some of the most significant research in modern memory. Please
feel free to call me to further discuss these findings.
