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Kelley Prof: Discounts May Hurt Luxury Brands in the Long Run

Retailers must walk a fine line between maximizing short-term sales through discounts and protecting brands in the long term, according to new research from the Kelley School of Business at Indiana University.

"The Effects of Discount Location and Frame on Consumers' Price Estimates" was featured in the Journal of Retailing and was written by H. Shanker Krishnan, professor of marketing at the Kelley School, Devon DelVecchio of Miami University in Ohio and Arun Lakshmanan of University of Buffalo, SUNY. The study looked at ways to boost the effectiveness of special sales discounts while also avoiding strategies that could eventually backfire.

Making discounts more effective
The researchers found that the following made consumers more likely to buy discounted items:

  • Placing discount information in close proximity to product: An in-store sign announcing a special price was often more effective than sending discount information through the mail and failing to mark items in-store.
  • Emphasizing dollar discounts over percentage discounts: "Highlighting price reductions in simple, real dollar terms is a more compelling sales inducement than, say '25 percent off,'" said Krishnan in a Kelley press release.
The caveat: luxury items
The authors found that using the above techniques with luxury items can backfire. If consumers associate luxury items with discounted prices, Krishnan explains, "They'll experience severe sticker shock their next go-around -- and brand loyalty can suffer."

For luxury items, percentage discounts work better, and the authors also advise skipping the in-store signs and sending out coupons and ads instead. While this may mean a less effective sales promotion, doing so protects the brand's value in the long run.

People expect discounts on certain items
Retailers should also be aware that frequently discounted items such as clothes and CDs can be difficult to convince people to buy at full price, because the discounted prices have become the norm in shoppers' minds. Krishnan warns, "If the discount message disappears, buyers may be put off and seek out discount prices on other, related products."

However, retailers of big-ticket items don't need to worry quite so much about price expectations. The reason? Many shoppers simply won't remember what they paid for the last TV or sofa.

Image courtesy of Flickr user The Consumerist, CC 2.0.