Large discounts hurt sales

Credence goods

Dr Cao wondered if large discounts indeed help in getting more customers. He and his colleagues Dr Kai-Lung Hui and Dr Hong Xu from Hong Kong University of Science and Technology analysed 19,978 deals from Groupon and conducted an experiment. Cao: “Surprisingly, we found that large discounts don’t improve sales, but instead reduce sales. This negative effect is more prominent among credence goods, such as medical treatments and car repairs, because it’s difficult for consumers to know the true value of these services. We also see this negative effect on deals with low sales and when the deal is offered in areas with higher levels of income and education.”

Quality concerns

Cao and his colleagues say that this negative effect of large discounts occurs because people become concerned about the quality of the offered product or service. “Most deals on daily deal platforms are for services, which you obviously can’t return to get your money back if you are dissatisfied,” Cao said, adding that most deals are offered by small local companies that people don’t know very well. “The consumer reasons that if the product or service is good, it doesn’t need a large discount.”

Reviews

Cao also investigated if displaying positive reviews from people on websites like Facebook and Yelp counter the negative effect of large discounts and stimulate sales. Again, the assistant professor found a surprising effect. Cao: “Positive reviews combined with large discounts, actually make things worse. They reduce sales. We think people become suspicious if a product or service with many positive reviews is still offered with a large discount.”

Recommendations

If businesses want to use daily deal platforms to attract new customers, Cao recommends to give reasonable discounts, but not very large ones. "It’s also a good idea to use a flexible discount rate, whereby all customers get higher discounts when more sales are made. So, people who purchased the deal early, get some of their money back later, if certain sales thresholds are reached. And finally, don’t display third party reviews if you offer a large discount.”