February 27, 2003, 12:00 AM

When discounts drive customers away

Asking customers for a coupon code at checkout seriously alienates customers who don’t have such codes, says new research from Vanderbilt University’s Owen Graduate School of Management.

Evidence is accumulating that online retailing is becoming a lot like offline-except when it come to online discounts.

Standard operating procedure on most retail sites that offer coupons or discounts to some customers is to prompt all shoppers for the discount code at checkout. The problem, according to research released in February from Vanderbilt University’s Owen Graduate School of Management, is that the prompt causes customers without discounts to abandon their shopping carts. “When you ask, ‘Do you have a promotion code? If so, enter it’ you are pointing out to some customers that they don’t have the code,” says Mikhael Shor, assistant professor of economics, who co-authored the study with Richard L. Oliver, professor of management. “It’s like a clerk in a department store asking if you have a coupon when you’re checking out. It’s a silly question to ask and no one in a store would ask it.”

Because there are many other factors that affect the rate of abandoned shopping carts, Shor is unable to pinpoint the effect that the discount prompts have on the abandonment rate. But he notes in tests that led to the conclusions, 76% of test shoppers were likely to check out if they saw the prompt and had a discount code. That rate plummeted to 19% if they saw the prompt and didn’t have the code. “Even if you adjust for the shipping-cost surprise, possible problems with the site design and some consumers’ reluctance to enter their credit card numbers online, it seems to be a pretty large component of why people abandon carts,” Shor says.

Shor and Oliver’s test consisted of setting up a fake retail web site that looked like a real site, then asking volunteers to shop the site looking for a particular item. Volunteers, who were a mix of students and the general population, answered several questionnaires as they navigated the site so researchers could determine their reactions to the site before they reached checkout. The test group was made up of some shoppers who had a discount and others who did not. All the shoppers in the test group saw the prompt for the code. The control group had no discount codes and did not see a prompt.

Huge distinctions

“In a test like this, people are not personally involved in the outcome, so if you see significantly different behaviors between different treatments, then you can be sure there’ll be a problem in a real setting,” Shor says. “We saw huge distinctions between people who saw the code and those who did not.”

In fact, some retailers who offer discount prompts know it’s a problem. “Many of our retailer customers have told us it’s an issue and we’ve seen it ourselves,” says Matthew Moog, president and CEO of Chicago-based CoolSavings Inc., a provider of online coupons. But the problem is double-edged, he says. “If a site asks for a promotion code, they’ll lose customers who feel cheated. But if they don’t offer the discount, they won’t convert some customers that they otherwise would,” Moog says.

The answer, Moog says, is to link the customer from the e-mail to a special page that keeps the discount in front of the customer as she shops. Then at checkout, the retailer’s system can automatically enter the discount into the shopping cart or prompt the customer to do so. Meanwhile, customers without discount are shopping at the regular pages.

Cross-discipline problem

Fixing the problem isn’t always easy, Moog notes. “It’s a multi-disciplinary problem,” he says. “It involves technology, marketing, merchandising and CRM and many times those are in different parts of a retail organization.”

Compounding the problem is the discovery that the least technologically sophisticated consumers are least likely to have a discount code and so if they have a negative experience, they are not likely to become enthusiastic online shoppers, Shor says. Researchers asked the test subjects if they thought it was worth their time to find deals online. “The correlation with those who said it was worth their time had nothing to do with value,” Shor says. “It’s correlated with technical expertise. It’s worth their time because it’s probably really easy for them to find discounts.”

A retailer who does not address this problem risks not only lost sales, but a tarnished image as well, Shor says. “We heard from subjects that not only did they think they weren’t getting a good deal, but they also questioned the quality of the merchandise,” he says. “They thought that if the retailer can offer a discount on this, it must not be as good as I thought.”


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