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Online Retailers should “Build” their Product Discounts

One of the most lucrative aspects of online retail is the sheer number of bargains one can get on sites like Amazon, Flipkart, or Big Basket. One of the leading online grocery retailers in the US offers 37% of its product options at a discount at any time. Indian online retailers also follow this policy of multiple discounts, especially considering the price sensitivity of Indian consumers. However, the effect of multiple discounts during the same online shopping trip is unknown. A study, therefore, examines how encountering multiple price discounts affects consumers’ purchase intentions.

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The study found that consumer reactions vary over multiple discounts. This is the result of information they have already come across in the form of prior discounts. That is, how a customer reacts to a particular discount will depend on what a customer has already learnt about the online retailer’s discount policy. For example, a customer looking for luggage finds that four different brands are offering discounts between 4% and 5%. When they come across a fifth brand, whether that brand is offering a discount or not will determine the customer’s decision to consider that brand for purchase.

Because of this, the magnitude of each discount is critical. For the initial purchase, a customer is likely to purchase a product regardless of whether the discount is big or small. However, the magnitude of the discount can affect their decision regarding a subsequent product with a moderate discount. If the initial discount is large, the moderate discount can seem low in comparison, making it less likely that the customer will buy the product. If the initial discount is small, the subsequent moderate discount appears more lucrative in comparison, so the customer is more likely to purchase the product.

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As a result, the most effective discount strategy for retailers is one of “build”. In the “build” strategy, retailers offer shallow discounts during the early part of a consumer’s shopping trip and gradually increase the magnitude of discounts over the trip. Retailers can utilise this strategy in three ways.

First, in the case of products and services that require multiple steps, they can use incremental discounting with each step or change discounts in real-time. For example, if a customer is purchasing a customisable computer, they might pick the parts/specifications in a fixed order (e.g., screen, then RAM, then processor), and the retailer can increase the discounts on subsequent parts (e.g., 2% on screen, 2.5% on RAM, 4% on processor).

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Second, retailers can control the placement of content on their home page, search results page, or emails and arrange different discounts based on consumers’ scanning patterns. For example, if a customer on a grocery website searches for chocolate chip cookies, the search results might appear in increasing order of discounts.

Finally, retailers can personalise discounts. Online retailers have access to customer data like product type preferences (utilitarian or hedonic), style of purchasing (from a list or based on promotions), the average amount spent during a shopping trip, and other decision-making factors. Using this data, they can customise the sequence of discounts according to customers’ experience, loyalty, and perceived motivation.

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