[eNews: Layperson Talk] When Discount Hurts Sales

HUI, Kai Lung

In the latest Layperson Talk titled “When and How to Promote Our Products”, Professor Kai-Lung HUI talked about his study in an easy-to-understand language. Welcome to review his talk or read the summary below.

How much should we discount our products or services? Many online sellers offer deep discounts to attract consumers. This is especially the case in online markets where the sellers are often less known to consumers. The question is whether such a promotional tactic helps the sales. It defeats the sellers’ advertising or promotional purposes if the discounts drive consumers away.

Here, we show that in the online daily-deal market, deep discounts hurt sales. This negative effect of discount is more prominent among credence goods (for which it is difficult for consumers to assess the quality even after consumption) and deals with low sales, and when the deals are offered in cities with higher income and better education, suggesting consumers are concerned about product quality. Displaying third-party support cannot address this quality concern. We find that this negative discount effect vanishes, i.e., discount actually helps the sales, when sellers can eliminate quality concerns by, for example, free return guarantees.

Management insight: Offering deep discounts is not a good way to attract consumers online when there is information asymmetry and consumers are concerned about product quality. Sellers should devise more focused strategies to address consumers’ quality concern in online markets.

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