The Lingering Impact of Promotional Price Cuts

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Beware: The promotional benefits of splashy price cuts can sometimes extend to competitors. | iStock/anouchka

In the brick-and-mortar marketplace, one of the risks of offering splashy short-term price cuts is that shoppers can become desensitized to such promotions, forcing sellers to continue feeding their customers’ “deal addiction” in a cycle of ever-deepening discounts.

But it turns out that promotional bargains can actually make shoppers more sensitive to future discounts, even if those discounts are negligible, according to new research coauthored by Pedro Gardete, an associate professor of marketing at Stanford Graduate School of Business.

The findings came from a rare field experiment in which a large supermarket chain in Chile allowed researchers to manipulate hundreds of real-world prices and later analyze purchase patterns of more than 200,000 customers, as captured by checkout scanners.

In the 10-week experiment, Gardete and three Chilean researchers — Andrés Elberg of Universidad Diego Portales, Rosario Macera of Universidad de Los Andes, and Carlos Noton of Universidad de Chile — offered discounts of varying amounts on hundreds of consumer goods across 17 product categories, including beer, candy, cheese, milk, water, and yogurt. For five weeks, some stores in the chain offered customers 30% discounts for products in a specific category, while others offered “shallow” 10% discounts for the same products. In the second half of the study, also five weeks long, all the stores offered discounts of 10% for identical products.

The Push of Promotional Tailwinds

The results were surprising: Customers who received the initial deeper discounts were 22% more likely to respond to the shallower discounts offered later. “If you give consumers a big promotion, they become more responsive to any degree of promotion in the future,” Gardete says.

The downside for sellers is that the marketing tailwind of a big discount isn’t confined to their products alone — it often spills over to competitors’. “When you give a promotion, you’re increasing your market share not just today but also tomorrow,” Gardete says. “The problem is that once consumers are attuned to promotions, your competitors can step in with their own discounts, and it snowballs. That can be bad for everyone’s profits, but it’s unambiguously good for consumers.”

This down-pricing snowball effect tends to hurt small firms more than large firms, the researchers say, because small firms are more likely to offer big initial discounts as a way to attract attention. “Once the whole category finds it beneficial to promote, all firms may become worse off, with small firms losing the most,” they write.

Adjust as You Go

Gardete recommends that marketing managers do a better job of monitoring shoppers’ response to price discounts in real time so they can make adjustments along the way. Too many marketers stick with predetermined pricing schedules and measure their impact retroactively, he says. “I don’t think they’re using promotion responsiveness correctly.”

The scheme of deploying deep discounts now to make buyers more susceptible to deep discounts later works best in bargain chains, such as Walmart. “We find it more relevant to consumers who rely on promotions to start with,” Gardete says.