What Science Says About Discounts, Promotions and Free Offers

In 1887, Coca-Cola distributed the first-ever coupon. Little did the company realize how important the concept would be in shaping the future of commerce.
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In 1887, Coca-Cola distributed the first-ever coupon. Little did the company realize how important the concept would be in shaping the future of commerce.

With the Coca-Cola voucher, recipients could redeem one free glass of Coke at any dispensary. Coke, which was introduced a year earlier, benefitted from this marketing strategy as it encouraged both consumer and vendor adoption. Families would visit their local pharmacies to get their free Coke and give it a try. In turn, pharmacy owners would tap Coca-Cola to replenish their supply as demand grew. The manufacturer's coupons worked, and it was just the beginning of something much bigger.

According to Coupon Sherpa, "Between 1894 and 1913, an estimated one-in-nine Americans had received a free Coca-Cola, for a total of 8,500,000 free drinks. By 1895, Coca-Cola was being served in every state." Coke had solidified its brand as a household name. Today, Coke is the world's best-selling carbonated beverage thanks to more than a century of clever marketing strategies including coupons, deals and markdowns.

Now, nearly every brand and retailer uses discounts or other promotions to grow their businesses too. Companies that understand the psychology behind special offers create a favorable brand image, deliver happiness to new and returning customers, and boost long-term profitability and sales.

Below are several studies that reveal how consumers react to coupons and how strategic brand discounts and freebies can contribute to a company's success.

Coupons create happiness

In 2012, Coupons.com commissioned a study led by Dr. Paul J. Zak, professor of Neuroeconomics at Claremont Graduate University, to learn how coupons impact people's happiness, health and stress. Together, they discovered that coupon recipients who got a $10 voucher experienced a 38 percent rise in oxytocin levels and were 11 percent happier than those who did not receive a coupon. Furthermore, their respiration rates dropped 32 percent, heart rates decreased by 5 percent and sweat levels were reportedly 20 times lower than their peers. Consequently, they felt more relaxed and less stressed.

Though shoppers now practically demand deals, they still find delight and joy in receiving an exclusive offer. Often, a cause for celebration is an unexpected coupon from a favored brand that rarely doles out discounts. Sometimes, the welcome surprise of a promotional sale in a customer's inbox is enough to spark an excited shopping spree.

Deals boost overall revenue

Last year, consumers redeemed 2.84 billion coupons (of 319 billion coupons distributed), according to intelligence commerce network operator Inmar. Crafty customers know when and where to find a good deal, and brands that issue special offers create win-win scenarios for shoppers who save money and retailers who grow their sales.

Big brands are increasingly adding coupons to their marketing mix to boost their bottom line. Data from advertising firm BIA/Kelsey suggests, "Small businesses estimate 17.7 percent of their total business in the next 12 months will be generated by customer acquisition promotions such as discount deals, daily deals, coupons or similar offers." Successful retailers bolster their bottom line using multiple channels. Knowing that their customer base will include shoppers who happily pay full price and buyers who eagerly wait for a new coupon to appear, smart brands deliver special deals to different segments of their contact list to encourage everyone to complete their next purchase.

Discounts discourage cart abandonment and encourage new trial

When was the last time you purchased something new from an unfamiliar brand without a coupon? For most shoppers, buying something for the first time at full price without having any personal experience with the item or peer reviews to lean on can be intimidating. But even a slight discount can change a buyer's attitude towards a risky purchase.

Statistics from VoucherCloud reveal that 57 percent of shoppers are motivated to complete a first-time purchase when they are able to redeem a coupon. In the absence of a special deal, customers would otherwise abandon their carts; some shoppers feel a first-time buyer discount is a prerequisite for brands looking to acquire new customers. That is because 62 percent of consumers invest two or more hours each week scouring the web for promotions. Fortunately, retailers can rest assured that any coupons issued may still attract loyal, lifelong customers. In fact, 91 percent of buyers who redeem coupons say they would visit the same retailers again.

As long as shoppers find value in your offerings, coupon clippers may even purchase your products again later at full price.

Promotions influence purchases

A 2013 global survey by RetailMeNot, found that of its 10,009 participants, 51 percent agreed that they were influenced by deals, discounts or sales when shopping online. In the U.S., where the sample size was 1,000 respondents, 56 percent felt the same.

Using coupons, retailers can encourage customers to:

  • Add specific items to their cart including excess inventory, higher-margin products or out-of-season goods
  • Discover new, related products to complement product launches
  • Spend above a specified minimum order total

Think of discounts and promotions as an easy way to soft sell shoppers. Many times when a coupon is available, customers may spend more of their energy and time convincing themselves not to purchase.

Shoppers reciprocate samples

Sample- or trial-size products cost little-to-nothing to produce, yet they are a major revenue driver for retailers online and offline. Brands offer a risk-free proposition to consumers who can try something new, which they may even like, for free. The stores that do manage to impress shoppers with their samples earn consumer loyalty and trust and generate profitable sales due to our natural desire to reciprocate goodwill.

For an article in The Atlantic, associate editor Joe Pinsker explains, "People love free.... Retailers, too, have their own reasons to love sampling, from the financial (samples have boosted sales in some cases by as much as 2,000 percent) to the behavioral (they can sway people to habitually buy things that they never used to purchase)."

Stores that give away free value start new customer relationships off on the right foot. Over time, the retailer's perceived "generosity" makes it more likable and that also leads to positive brand associations, which may improve customer referrals and sales.

The price of free

According to academic and behavioral scientist Dan Ariely, zero is a special price. To many, it is worth a lot more than its face value.

Almost irrationally, consumers "perceive the benefits associated with free products as higher" than their absolute value. In a paper for Marketing Science journal, Ariely found that, "People appear to act as if zero pricing of a good not only decreases its cost, but also adds to its benefits." Therefore, retailers who price items at a cost of zero or give things away for free offer special appeal to everyday customers. We value it more, which is why so many brands take advantage of the "free gift with purchase" tactic to increase average order totals among shoppers.

The power of free

Defying conventional logic, consumers are more drawn to free items more than they are to discounted products, even when the discount helps shoppers save more money or get more value from their purchase.

In 2012, The Economist published a post titled, "Something Doesn't Add Up." In it, the author explained that researchers from the Carlson School of Management at the University of Minnesota conducted an experiment to learn more about how consumers reacted to discounts and freebies. The conclusion was, "Shoppers... much prefer getting something extra free to getting something cheaper." Sadly, the explanation for the behavior is less than flattering. "The main reason is that most people are useless at fractions."

As emotional creatures, people are more inclined to accept free offers than discounted ones. The results speak for themselves. "The researchers sold 73 percent more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount." Whether they are right or not, shoppers believe they get a better deal when they walk away with something for free instead of spending less on their overall purchase.

Final thoughts

Ultimately, the best discounts, promotions and free products strategies help you:

  • Avoid bargain hunters who may overuse your customer service resources and never convert into loyal, returning customers.
  • Preserve your brand's integrity by limiting the number of coupons customers can use and steering clear of deep discounts.
  • Encourage new product trials, repeat purchases and higher average order totals through incentives that motivate buyers to add more items to their cart and to complete their order.

How have you used special offers to grow your business?

Image sources: 1, 2, 3, 4, 5, 6, 7, 8

This post originally appeared on Receiptful's Ecommerce Success Academy and is republished with permission.


Danny Wong is the co-founder of Blank Label, an award-winning luxury menswear company. He is also a digital marketing consultant and freelance writer. To connect, tweet him @dannywong1190 or message him on LinkedIn.

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