How to make product discounts more effective?

Discounts are the most common form of consumer promotion and have been studied extensively. However, the findings vary based on context and other variables. A meta-analysis is a type of study that selects quality research and finds answers to critical questions. A meta-analysis performed on discounts suggests that amount-off discounts work better than percentage discounts in certain cases. They lead to more positive customer responses when the product is a tangible good rather than experiential, the products are higher priced, and the offer is direct rather than coupon-based.

Price promotions or discounts are the most commonly used consumer promotions tool and are valuable tools for a marketer. They are effective in pushing sales, getting new customers, and clearing inventory. It is no surprise, therefore, that a significant number of studies have tried to understand how discounts affect consumer responses, and how the two types of discounts—amount-off and percentage-off—differ in generating positive consumer responses. However, these studies show mixed results including positive, negative, and no responses to amount-off promotions. So, marketers, confused by these studies, are left with the question: How, actually, do amount-off promotions affect consumer responses? A study performed a meta-analysis of selected 19 studies based on their quality to find when amount-off discounts have a positive impact on consumer responses.

The study found that one of the most important factors that determine consumer response to discounts is the framing of the offer. Percentage discounts, for instance, tend to have lower impact than amount discounts since customers need to calculate the exact discount to understand how much they will gain. This behaviour becomes more pronounced for higher priced products. Customers tend to perceive amount discounts as being higher than percentage discounts for higher priced products even if the actual impact is the same. The reverse is true for lower priced products. For example, a customer would feel that a 20% off is higher than a ₹ 8 discount for a ₹ 40 product, but ₹ 200 off would seem higher than a 20% off for a ₹ 1000 product to them.

Similarly, the type of product can also dictate the impact of amount-off discounts. When buying tangible products with functional and utilitarian uses, such as groceries, regular clothes, and stationery, customers respond better to amount-off discounts. The explanation for this is that customers do not want to spend too much time and energy on the purchase process, and amount discounts quickly signal a good deal. For experiential products, like travel, movies, and watches, customers respond better to percentage discounts.

The type of offer can also affect how consumers perceive their benefits from the offer and how they respond to it. Coupon discounts are low impact because they involve the effort of collecting and redeeming the coupons, especially if the coupon discount is presented as a percentage. Not knowing the MRP, customers aren’t able to calculate how much they will benefit. This could cause them to overestimate the discount amount and, if the expectation is not met, cause them to not buy that product.

This study has important conclusions for all marketers and retailers in particular. They may need to rethink how they optimise price discounts to achieve objectives in these ultra-competitive times. Given customers’ responses to product types, price ranges, and discount types, they can tailor their discount offers along these lines. Also, if giving percentage discounts, they can offer these through coupons and offer only amount-off promotions for direct discounts. Overall, amount-off discounts tend to be more effective than percentage-off discounts. Therefore, if unsure about the type of discount to offer, they should pick amount-off discounts.

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