Conditional Promotions and Consumer Overspending

Abstract

T his study investigates the effects of conditional promotions (e.g., buy 2 or more, get 30% off; spend $50 or more, get $15 off) on consumer behavior and the seller's profit. When a deal is presented with a minimum purchase quantity or a minimum spending requirement, experimental studies have shown some consumers are induced to spend more in order to obtain a discount. To study this behavior, we model a market in which consumers can be heterogeneous in two dimensions: willingness to pay for the product and deal proneness to a price discount. We examine two types of conditional promotions that are widely used in practice: (i) all-unit discount, in which a price reduction applies to every unit of a purchase once the minimum requirement is met, and (ii) fixed-amount discount, in which a fixed amount of discount is awarded to the total expense that meets the requirement. We show that deal-prone consumers may be induced to overspend when offered a conditional discount. However, consumer overspending benefits the seller only when the market contains a sufficiently large proportion of highly deal-prone or high-valuation consumers. Comparing the two types of discounts, we show that the all-unit discount outperforms the fixed-amount discount when the regular price for the product is high, whereas the fixed-amount discount is more profitable than the all-unit discount when some consumers would make a purchase even without a discount. Our study suggests adopting an appropriate type of conditional discount can effectively improve the seller's profit over what would be obtained through selling at the regular price or a conventional price markdown. Furthermore, we find that conditional discounts can also improve consumer welfare, resulting in win-win situations for both retailers and consumers.

Service supply chain management: a behavioural operations perspective

“…Breidbach et al (2015) suggest that the current research on service supply chain is narrow and lacking in-depth analyses from the view of customer while some scholars have begun attaching importance to customer behaviour in manufacturing supply chain. For instance, Yi et al (2018) discuss the impact of customer's fairness concern on channel selection, and Amornpetchkul et al (2018) study the overspending behaviour of customer. Moreover, the limited attention to service integration management indicates that the uniqueness of this SI may not be fully understood.…”

Going Green: The Effect of Green Labels on Delivery Time Slot Choices

“…The prevailing demand-management paradigm uses price to steer behavior (Amornpetchkul et al 2018, Ceryan et al 2018, Shen and Yu 2019. For instance, service providers often enlist price incentives to encourage customers to select delivery time slots that facilitate efficient route plans.…”

Consumer Engagement Through Conditional Promotions

“…For example, in one of the studies, the initial purchase of educational CD (driver; high purchase likelihood in scholar context) led to the significantly higher purchase of a key chain (unrelated -target item). In comparison, when the initial purchase was a light bulb (low purchase likelihood in scholar context) or there was no initial purchase as in the control group, the purchase likelihood of keychain was not significantly higher (Amornpetchkul et al, 2018;Dhar et al, 2007;Gollwitzer, 1990;Lee & Ariely, 2006).…”