Discount coupons: when to give % off vs $ amount off

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📝 Context

Topics: Promotions | Pricing
For: B2C
Research date: October 2020
Universities: Deakin Business School & Monash Business School

You’re about to launch your large annual sale across your stores and website and are trying to decide what promotion you want to run:

• 15% off on all items in the store

• $15 off all orders over $50

Science says that “15% off” will be more effective at maximizing profit. With this simple decision, one retailer saw a massive ~10% increase in revenue.

P.S.: Be careful how large of a discount you offer, very big discounts (e.g. 60%) can reduce sales if customers can’t verify the quality of your product.

📈 Recommendation

Use a percentage coupon (e.g. 20% off) if your promotion can be used for any item in your store. Use a fixed amount coupon (e.g. $20 discount) if your promotion is for a specific product or brand only.

Revenues and profits from your promotions will be higher.

🎓 Findings

• Offering a store-wide discount coupon as a percentage, instead of a fixed amount off (e.g. $5 off), leads to more spending by customers and larger basket sizes despite giving customers less savings. For discounts on specific products or brands, fixed amount discounts are more effective.

• As part of an analysis of over 70,000 online orders for an online grocery retailer over 10 months, researchers found that store-wide coupons shown as a percentage off (vs a fixed amount off) led to:

  • 42% additional spending by customers ($43.53 more spending vs. $30.59 more)

  • 56% larger basket sizes (5.44 more items vs. 3.48 more items, on average)

  • 50% more profitability for the retailer ($7 average customer savings vs. $14 savings)

• Previous research shows that fixed amount coupons for specific brands or products are effective at increasing spending.

• Both % and $ off coupons lead to roughly the same additional time before a customer’s next purchase compared to when they buy without a discount.

🧠 Why it works

• Discount coupons increase the amount we spend and the number of items we buy, by putting us in a good mood because we think we’re getting more value when buying with the coupon.

• It’s easier for us to process and calculate savings for a fixed amount (e.g. $10 off) coupon, making them more effective for discounts for a specific product or brand.

• We like the wider range of choice we have in a store-wide coupon, as it allows us to choose something that better matches our needs and encourages us to try different varieties.

• When this coupon is presented as a percentage, we also consider it a larger saving, as discounts shown as percentages seem larger than those shown as a fixed amount (e.g. 20% off $25 seems larger than $5 off $25). It also feels that we don’t have an upper limit on how much we can save (the more we spend, the more we save).

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✋ Limitations

• The research looked at the online store for an FMCG retailer that mostly sells groceries. It’s likely the effect remains the same across other categories and product types, but hasn’t been studied.

• The study analyzed coupons that did not expire. This may influence customers to wait until they had multiple purchases before buying, to maximize the savings from the coupon.

• It’s unknown if allowing customers to use multiple coupons or promotions together would change how this effect works.

👀 Real-life example

Sephora’s retail outlets offer tiered fixed amount discounts depending on how much people spend in a visit. 

❌ Issue: This promotion is run on all items in the store, so it would be more effective if it was shown as a percentage instead of fixed amounts.

✅ Solution: Sephora’s could use the Science-based Playbook of Pricing & Promotions to help them optimize their promotions. Some changes they could make include:Reframing the promotions as percentage discounts instead of fixed amounts (e.g. 20% off if you spend more than $100).

• Reverse how they frame the promotion to make the discount seem larger (e.g. “Was 25% more” vs “Now 20% less”, sounds larger, although they are mathematically equivalent).

• They’ve rightly made the numbers larger than the rest of the text, to make it seem like a larger discount. They can also increase the chances of people buying by using italic fonts for the discount, to build a sense of urgency.

• Using a non-rounded or exact number (e.g. 22.5% instead of 25%) instead can also make the promotion more effective by also building a sense of urgency amongst shoppers.

🔍 Study type

Market observation (analysis of 70,859 orders of an Australian FMCG retailer online over 10 months)

📖 Research

Empirical Decomposition of Customer Responses to Discount Coupons in Online FMCG Retailing. Journal of Retailing and Consumer Services (October 2020).

🏫 Researchers

• Samaneh Montazeri. Deakin Business School.

• Ali Tamaddoni. Deakin Business School.

• Stanislav Stakhovych. Monash Business School.

• Michael Ewing. Deakin Business School.

Remember: This is a 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.

🎁 Bonus mini-insight

From the Science Says Playbook of Pricing & Promotions.

🎓 Insight: When a product is priced at below 100 (e.g. $100, €100, 100 rupees), it might be better to use a % percent discount.

📈 Recommendation: For products costing more than $100, use a fixed amount discount (e.g. $25 off). For items costing less than $100, use a percentage discount (e.g. 25% off). Use 100 as the benchmark regardless of the currency.

🧠 Why it works: We don’t always calculate discounts, but rather look at the absolute number that’s shown (e.g. 15% off we consider as a discount of 15). Using fixed amounts for prices higher than $100 makes the discount seem larger than if a percentage was used (e.g. $40 off a $200 item seems larger than saying 20% off).

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