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Kelley School of Business

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Last modified: Wednesday, November 18, 2009

New study on retail discounting: What works for some products might be a bust for others

IU Kelley School research pinpoints tactics that drive sales without eroding brand equity

Nov. 18, 2009

BLOOMINGTON, Ind. -- Retailers beware. Some tried-and-true discounting tactics for pepping up holiday season sales can be a boon for some products -- but a bust for others.

Shopping Mall

Photo by Paul Keleher

First-of-its kind research from the Indiana University Kelley School of Business confirms that certain kinds of point-of-purchase discounts can effectively attract more buyers in the short-term but for some products can tarnish sales and brand equity over time.

Researchers invited study participants -- more than 100 university students -- into an imaginary local grocery store where they were asked to shop "as they do in real life." The researchers manipulated discount prices of common items and interviewed participants to determine how this might have influenced purchases. They found that for some products, placing discount messages in close proximity to discounted items was the most effective way to build sales.

Applying this knowledge to the marketplace, the researchers indicated that, for example, holiday shoppers looking for gift ideas in electronics stores would be more inclined to buy items like digital cameras flanked by "$50 Off, Limited Time Only" than they would be if they received the same message via regular mail.

Quick computing translates into sales

The study, titled "The Effects of Discount Location and Frame on Consumers' Price Estimates," also demonstrated that buyers are more inclined to make purchases when stores communicate discounts in ways that are instantly computable.

H. Shanker Krishnan

H. Shanker Krishnan

Print-Quality Photo

"Retailers should understand that most customers aren't willing to calculate savings if they have to think too hard about the math and thus might not buy the product," said H. Shanker Krishnan, professor of marketing at the Kelley School and co-author of the study. "Highlighting price reductions in simple, real dollar terms is a more compelling sales inducement than, say '25 percent off.'"

However, the study noted that closely associating products with discounts can have negative implications over time.

"People come to associate certain prices with certain products," said Krishnan. "If the discount message disappears, buyers may be put off and seek out discount prices on other, related products."

Frequently purchased items, like music and clothing, are particularly susceptible to buyer resistance when discounts are removed. "The discounted prices are much more likely to become fixed and expected in shoppers' minds," said Krishnan.

On the other hand, the study showed that less frequently purchased items, like TVs, may be more immune to consumer price expectations. "The lifespan of durable items is such that shoppers forget what they last paid for them," he said.

Luxury brands are special case

Then there is the issue of protecting brand equity. The study pointed out that point-of-purchase discounting requires a strategic, highly selective approach to ensure that certain products maintain their long-term sales potential.

"It is particularly important that shoppers don't come to associate luxury items with lower prices," Krishnan said. "Otherwise, they'll experience severe sticker-shock their next go-around -- and brand loyalty can suffer."

For luxury brands, the best bet might be to offer discounts via percentages and to physically separate the discount message from the product by using coupons, ads, general in-store promotions and other tactics. The price reductions may have a less telling, short-term impact on sales, but the brand equity will be protected.

Overall, said Krishnan, discounting can work very favorably for retailers if they make the effort to understand the complexities and make knowledgeable decisions.

"This seems like common sense," he said, "but so often you see retailers seeking to maximize short-term sales while shooting themselves in the foot down the road."

The study appeared in the September issue of Journal of Retailing. It was coauthored by Devon DelVecchio at Miami University in Ohio and Arun Lakshmanan at University of Buffalo, SUNY. The study is available for download at[1].pdf.