December 28th, 2008 | 4 MIN READ

Are Dollar Discounts the Worst Incentives?

Written by author_profile_images Linda Bustos

Linda is an ecommerce industry analyst and consultant specializing in conversion optimization and digital transformation.

A couple weeks ago I posted a Frictionary -- a collection of design elements that cause resistance with customers on ecommerce sites (and may cause the customer to abandon the sales process). As mentioned in the post, friction exists in the mind of the customer and, while you can't eliminate friction completely, you can take steps to minimize it (one way is to adjust your site design and usability).

You also want to "balance" friction with incentives to stick around and actually buy something -- from you.

Incentives include dollar discounts, % discounts, free shipping, free gift with purchase, no tax, buy one get one free and so on. While at the Marketing Experiments Landing Page Optimization workshop last month, we spent a good hour and a half discussing incentives, during which I "Tweeted" (sent out a short message over the social network Twitter) a quote from Dr. Flint McGlaughlin:

"Worst incentive you can offer is a cash discount - Dr. Flint McLaughlin" (before I knew how to spell his name)

I received a lot of direct messages from my Twitter community asking for an explanation, which is a little hard to do with the 140 characters Twitter limits messages to. A blog post is more appropriate.

Personally, I don't know if a cash discount is better or worse than free shipping, free gift card, free gas card, free clock radio or dinner with "The Real Shaq." And neither do you -- unless you test it. Different products, different customers, different economic conditions -- there's no cut and dry answer.

The rationale

Dr. Flint specializes in marketing tests, so I can't imagine he'd make this statement lightly. Here's the rationale -- it's all about Perceived Value. When you offer a dollar discount, the benefit to the customer can never exceed the face value of the discount. You could offer a $10 discount on a $100 product or free shipping which might cost a customer $15, $20 or more (depending on what you want to charge for shipping).

Similarly, you may test a $10 rebate against a $20 gift card (which may be restricted to regular priced merchandise only). Again the perceived value is higher with the $20 face value of the card. Plus, the customer may never redeem the gift card, or redeem it and spend more than its face value. The point is, there are some incentives you can invent or inflate a value for, but a cash discount is always equal to its nominal value.

Cash discounts also devalue the product somewhat, which is why many manufacturers favor MAP (minimum advertised price) policies.

Measuring the impact of an incentive

How do you choose a winner in an A/B test? Pick the higher conversion rate, right? Not necessarily. A higher conversion rate doesn't mean a better ROI if one incentive actually carries higher net costs for you as a retailer (the wholesale value of the free gift, the actual shipping cost for a product etc).

Marketing Experiments held a call-in web clinic last year called Finding the Ideal Incentive: How We Increased Email Capture by 319% with a companion research brief if you want to see the results of some testing Dr. Flint's team has done. Worth checking out.

You could also use your email open rates as an indication of which offer-in-subject-line was more compelling at first blush -- this factors out the impact of friction in the buying process which also impacts your ultimate conversion and ROI (i.e. it was a slam-dunk offer but the landing page fumbled).

What does the customer really want?

If a customer is going to make a rational decision that he/she is better off with $10 off or free shipping - we assume the customer has access to more information than he/she actually has available in a split test. If I'm asked whether I'd prefer $10 off or free shipping, I want to know how much shipping cost I save. Since I'm only shown one of the incentives tested, it comes down to "do I care" about the incentive I'm presented with.

An incentive's attractiveness to the individual depends on 3 P's: the Product, the Purpose of the purchase (want vs. need) and the Personality of the customer. In this economy, many are simply not buying luxuries, so a simple "free shipping" offer bounces off the screen. If the customer thinks "I can't buy regular priced items anymore" -- a 10% discount may make them feel they can justify the purchase since they're "saving money." (Think of the customer who drives halfway across town to buy the loss leaders in the supermarket circulars).

Similarly, bonus gift cards mean "you have to spend money again to benefit" which scares the cash-strapped or "you have to shop here again to benefit" which doesn't impress the non-loyal.

And here lies the problem with A/B split tests - you're measuring the behavior of the majority rather than matching the motivations of the individual. But without really good personalization strategies and tools, it's difficult to execute the latter.

If we could understand which incentives match an individual's continually shifting wants and needs, and target them accordingly, there would be no best or worst incentives. Anyone found this tool yet?

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