February 5

[Nugget #24] Face Value of Discount Coupons: When Less Sells More

Your discount campaign did not turn as you expected...

As a sales manager, you plan a new promotion. You are in the unbelievably lucky situation that your promotional budget is not restricted. “Wow,” you think, “let us create real sales momentum and offer serious discounts.”

Your promotional tool is coupons. Customers can redeem these coupons for various products of a specific brand or product line (technical term: “vertically differentiated products”) and not just for a particular product. Product line coupons are redeemable, for example, for any Apple notebook, for any Lindt chocolate gift box, or for any of the different buffet menus in your favorite Korean restaurant.

In the past, your coupon value was $5 that customers could use for any product in your product line. The average price for your products is about $50. Now you raise your coupon value to $20, expecting that your customers would spend more and buy more expensive products.

You launch the campaign, and you find that customers actually buy more when the face value of your coupon is higher.

But to your surprise, you also find that customers would choose less expensive products when the coupon value is higher. You scratch your head turn to a recently published paper by Jia et al. (2018).

The explanation.

The researchers explain that coupons have two effects on a customer’s purchase decision. 

First, a coupon increases the available budget so that customers can and might spend more. Second, a coupon makes customers calculate a percentage discount, and customers would buy the option with the higher relative discount. Given that the coupon has the same face value, customers choose the cheaper of two options as the denominator is lower for the less expensive option. The researchers argue that the "savings comparison" mechanism only activates if two conditions are met: First, the difference in savings percentages is substantial and, second, customers have the mental energy available to do the cognitively demanding calculations.

Jia et al. (2018) provide the following example. You offer two products: Product A for $40 and product B for $60. The coupon face value is $5, so that the percentage savings are $5/$40 = 12.5% for product A and $5 / $60 = 8.3%. Hence, the relative percentage savings difference is 4.2% points. This difference might be too small to trigger a “savings comparison,” and only the “budget increase” effect applies: the customer buys the more expensive product B.

Now you raise the coupon face value to $25. The percentage savings become $25/$40 = 62.5% for product A and $25/60 = 41.7% for product B. The difference in savings increases to 20.8%. In this case, the “savings comparison” mechanism might kick in, and your customer chooses product A as this comes with a larger percentage discount. This means with a higher face value, customers redeem the coupon for a cheaper product. Vice versa, in this constellation, a moderate face value would make your customers turn to the more expensive product.

What you can do about it.

Jia et al. (2018) discovered specific conditions when a savings comparison mechanism gets activated, and the function of spending level on coupon face value assumes an inverted U-shape. In this situation, a moderate coupon face value is more effective than a high coupon face value to sell a higher-priced product option:

  • Customers do not experience overload (due to too many product choices or complicated product descriptions that would otherwise consume the mental energy necessary to conduct savings comparisons).
  • Customers care more about money and savings.
  • Customers have a higher tendency to compare products and options.
  • Customers have weak preexisting preferences for a product.

The bottom line

Think carefully about offering a moderate or high coupon face value to stimulate sales: customers might buy a less expensive product when the discount is higher in certain situations.

Jia, H., Yang, S., Lu, X., & Park, C. W. (2018). 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(4), 70-85.

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