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Can Discounts Lead to Lower Sales?

Discounts are a powerful marketing tool, and they’re often coupled with quantity limits. A store might advertise a sale on cereal, making clear that the lower price applies to up to two boxes per customer.

But offering a discount on a limited quantity may reduce sales, according to research by Shirley Zhang (a graduate of Booth’s PhD Program, now at American Express) and Chicago Booth’s Abigail Sussman and Christopher K. Hsee.

The researchers conducted an experiment at two supermarkets in China selling popular summertime peaches. They randomized whether a discount—the equivalent of 45 cents off each $1.20 peach—was offered and if so, whether it was limited to one or three peaches per person. Most people who bought peaches typically took four or five—until the stores offered customers the discount, Zhang, Sussman, and Zhee observed.

When customers were given a discount on just one peach, they continued to buy their usual quantity of four or five. But about half those who were offered a discount on three peaches indeed bought only three. Overall, offering the discount on three led the store to sell fewer peaches than when it offered no discount at all.

The sweet spot for sales

When peaches were priced regularly, shoppers in two supermarkets in China bought on average four peaches. But a discount—offered sometimes on one peach, and other times on three—changed how many the shoppers bought.

Consumers often have in mind a range of how much of a certain product they want, the researchers explain. For the peach buyers, it was four or five. If the limit on discounted items is much lower than the number of items they want, they’ll ignore the discount and buy the planned quantity. But if they find the limit only a little lower than their target amount but still an acceptable quantity, they’re likely to buy a smaller quantity than they otherwise would to feel that they’re taking full advantage of the lower per-unit price. The researchers note that they focused on the lower boundary of the acceptable range because that is where they expected to find this “dragging-down effect.”

In another experiment, participants were asked to imagine they were going to New York and planning to visit museums. Some were told they could buy a museum card that gave them no discounts (each visit would cost $30); some were offered a card that provided a $10 discount on the first museum; and those in a third group were offered a card giving $10 off each of the first three. They were then asked how many museums they planned to visit.

Those offered discounts on three museum visits were more likely to purchase exactly three museum tickets than those who’d been offered a discount on only one museum or no discount at all. Further, those offered discounts on three museum visits said they would purchase fewer museum tickets, on average, than other study participants.

When a discount limit falls within consumers’ acceptable range, even if it’s on the low end, they’re more likely to adopt that limit as their exact purchase quantity, the researchers write. Thus, offering a discount on a limited quantity may lead to lower sales than not offering any discount at all.

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