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📝 Intro

Scientists discovered decades ago that strong discounts have a negative effect on perceptions of product quality.

When a seller heavily discounts a product (e.g. 50% off), we want to understand why.

The answer we usually give ourselves is the most obvious one: the product is probably bad quality or nobody wants to buy it. Unless we’re convinced otherwise (e.g. we can verify the product’s quality, or it’s a shutting-down sale).

Today’s study analyzed 19,978 Groupon deals to understand at what point a discount is just too much - and hurts your sales instead of helping them.

P.S.: Some supermarkets try to avoid wasting unattractive fruit and vegetables (e.g. spotted apples, curved carrots) by heavily discounting them.

But 60% discounts reinforce our false belief that unattractive products are of bad quality and tend to backfire.

Instead, recent research found that it’s much more effective to simply call the fruit ‘ugly’ (and use a smaller discount of 20%), boost people’s self-esteem, or anthropomorphize the veggies (i.e. put a smiley face on them so we empathize with them).

Previous insight: Extraordinary warranties (100+ more insights here)

Deep discounts reduce sales if product quality is uncertain

Impacted metrics: Customer acquisition
Channels: Promotions | Discounts
For: B2C. Can be tested for B2B
Research date: July 2018

📈 Recommendation

Avoid deep discounts (60% off or more) if you don’t have a strong brand and it’s hard for customers to judge your product’s quality (e.g. they can’t try it in-store before buying).

Relatively low discounts are usually fine in the short-term (e.g. up to 40% or similar $ amounts).

🎓 Findings

• Previous research repeatedly found that price discounts reduce quality perception. This can hurt sales, particularly in the long term.

• This study found that in daily-deal platforms, the effect can be so extreme that higher discounts (= lower prices) can actually reduce sales.

• An analysis of 1.8m sales on Groupon found that:

  • The average discount was 55.6%

  • An additional 10% discount from that average, reduced sales by between -0.63% and -4.60% (depending on the data model used)

• A follow up lab experiment found that a 60% price discount is the threshold after which quality perceptions plummet.

• The effect is particularly strong for:

  • Deals with few sales

  • People with higher income and education, who tend to be more concerned with quality and less price-sensitive

  • Credence products, for which it’s hard to judge quality even after using them (e.g. medical treatment, automotive repair, expert services, health and organic food)

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🧠 Why it works

• Price is one of the key signals by which we judge a product’s quality.

• It becomes an even more important signal when we are unfamiliar with the brand we’re buying from and it’s hard to judge the quality of the product (e.g. an experience or a product we’re buying online, not in a store).

• When products are discounted we might even experience a negative quality placebo effect. For example, people who drank an energy drink sold at a discounted (vs full) price solved fewer puzzles.

✋ Limitations

• The study focuses on online daily-deal platforms. However, the negative effect of discounts on quality is well documented and the reduction of sales of deep discounts should impact other situations with product quality uncertainty and little-known sellers.

• The 60% discount threshold, where the effect appears to gain strength, was based on a single lab experiment - which weakens the finding.

🏢 Companies using this

• Small-medium businesses often offer deep discounts on platforms like The Fork (restaurants), Treatwell (beauty), or AppSumo (software).

⚡ Steps to implement

• If your brand is not strong and your product’s quality is hard to judge before purchase - avoid offering deep discounts.

• If you must offer discounts, keep them to a maximum of 60% off, not more.

🔍 Study type

Lab experiment and market observation (of 19,978 Groupon deals, January - March 2014). United States and Canada

📖 Research

Cao, Z., Hui, K. L., & Xu, H. (July 2018). When discounts hurt sales: The case of daily-deal markets. Information Systems Research.

[Link to paper]

🏫 Affiliations

Rotterdam School of Management, Erasmus University and School of Business and Management, Hong Kong University of Science and Technology. The Netherlands and Hong Kong

Remember: This is a new scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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