Coupons: when to give ‘10% off’ vs ‘$10 off’

Use % off (e.g. 5% or 10% off) instead of $ off (e.g. $10 or $30 off) when it can be used for everything you sell. Use $ off when you offer specific brand/product coupons.

Today’s research is a great example of how a straightforward tweak could increase a retailer’s revenue by a massive ~10% (the study found a 42.3% increase in sales. Discounts and promotions account for more than 25% of a typical FMCG company’s revenues).

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Previous tip: Discounts: use ‘was 25% higher’ instead of ‘now 20% lower’ (All tips here)

Use ‘% off’ coupons for store-wide discounts to increase sales

Impacted metrics: Customer spending
Channels: Promotions

Recommendation

When you run a store-wide promotion for all products (online or offline), use a % off coupon rather than a fixed $ amount off (10% off vs $20 off) to maximize profit.

When you are running a brand/product specific promotion, use a $ amount off coupon.

Make sure your coupons have an expiry date. If you have the ability, segment your customers and only send the coupon to the most profitable group(s).

Effects

  • Previous research suggests that coupons for a specific brand/product (if you don’t sell only one brand/product, of course) work best when they are a $ amount off vs a % off. For example, ‘$5 off Gilette razors’.

  • When the coupon is store-wide (applies to everything, or most, of what you sell), it’s better to use a % off amount vs a $ amount off. Customers spend more (in the study: $43.53 vs $30.59 more, a 42% increase), buy more (5.44 vs 3.48 more items, a 56% increase), and are 50% more profitable ($7 vs $14 total savings).

  • Both types of coupons significantly increase the time until a customer’s next purchase. The difference between % and $ off is negligible. However, the researchers found that this effect varies a lot between different groups of customers. Some will only see a moderate increase between purchases, others will see a huge increase (e.g. due to hoarding).

Why it works

  • We find coupons that are framed as $ off vs % off easier to understand and more attractive. That’s because a) we don’t have to calculate ourselves how much we will save and b) it reminds us of the monetary value we would miss out on (similar in some ways to $0 is better than ‘free’).

  • However, % off coupons remove any perceived upper limit to what we could save, putting us into a “the more I spend, the more I save” mindset.

  • There are different types of shoppers. Some will use your % off coupon to buy products they normally wouldn’t, while others will use it to hoard products they would normally buy anyway. That’s why if you can you should target them separately with different (or no) promotions.

Limitations

  • The analysis was performed on one online FMCG retailer (mainly selling groceries). It’s riskier to generalize to other product categories (e.g. much more expensive or rarely bought products) and to offline environments.

  • We don’t know what happens in a context where customers can use multiple promotions at the same time.

  • The coupons used in the study did not have an expiry date. Although the researchers tried to take that into account, it still influenced customers to wait until they had multiple purchases to make before using it and may have influenced results in other, unpredictable ways.

Companies using this

  • Most online retailers use coupon promotions, but it’s unclear how many retailers are making calculated decisions between using % off or $ amount off coupons.

Steps to implement

  • If you offer a store-wide discount, make sure you use a % discount with no upper limits to how much customers can buy.

  • If you have the statistical capabilities, shift away from targeting based on purchase history and target based on expected responses instead.

  • To do this, test your promotions on a sample of your customers and perform a cluster analysis based on responses. Select the group(s) that would be most profitable to target with the coupon (e.g. that will spend a lot and will only wait moderately longer to purchase again). Then, send the coupon only to customers similar to those in that group.

Study type

Market observation (of 70,859 orders on an online FMCG retailer), Australia

Source

Montazeri, S., Tamaddoni, A., Stakhovych, S., & Ewing, M. (October 2020). Empirical decomposition of customer responses to discount coupons in online FMCG retailing. Journal of Retailing and Consumer Services, 58, 102340.

[Link to paper]

Affiliations

Deakin Business School and Monash Business School, Australia

Remember: Because of the groundbreaking nature of this paper, it could be disproven in the future (although this is rare). It also may 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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