Advanced Analytics Blog

The Winter of Our Discount Tent

Recently, my husband, who had been scouring retailer websites for good deals on camping gear, exclaimed, “It’s the winter of our discount tent!”

“Um, what?” I asked.

“You know, Richard III’s speech in Shakespeare’s play — ‘Now is the winter of our discontent made glorious summer by this sun…’”

I replied, “Very punny.”

My husband is the Scoutmaster of a large, active Boy Scout troop. The Scouts go camping at least once a month, averaging 12-14 campouts per year. The troop maintains a variety of camping and outdoor gear, such as cook stoves, chuck boxes with cooking implements, safety equipment, and, yes, tents. The gear is “well-loved” and periodically needs replacement. The troop conducts a fundraiser each fall to pay for camping site/park fees and equipment. The Scouts are fortunate to take in several thousands of dollars in donations across fundraising efforts. Leadership uses this money judiciously by searching for the best prices when buying new equipment.

The troop often will purchase expensive items during the winter months when retailers use discounts to move merchandise. Who can resist those “2 for 1” and “50% off” sales? Finding great outdoor gear at great prices becomes a bit of a game among troop leaders. They have been known to regale one another with stories of bargains—“These backpacks were 33% off!” and “These camp stoves are buy 3 get 1 free!”

Discount 101

Getting a good deal is highly satisfying emotionally and monetarily. With this in mind, retailers leverage discounts to encourage purchases. Some frequently used discount tactics include:

• Price reduction—“Now lower price” appears on the shelf underneath products that haven’t sold well; it can also signal price matching with another retailer.
• $XX off—This approach “does the math” and implies that the price reduction is for a limited time.
• XX% off—This one can be more compelling to consumers than stating the exact monetary savings.

Discounts are often linked with (and disguised by) promotions. Here are a few examples:

• BOGO (Buy One, Get One)—This one can take other forms, such as Buy 3 and Get 1 Free. It’s a popular promotion used in the grocery channel. Consumers love getting something (the free product) for nothing. Retailers love that consumers buy more products than they might normally, just to get the free one.
• Buy X products and get a store gift card—Mass retailers offer this promotion because it encourages consumers to stock up while paying full price. The gift card isn’t always redeemed. If it is, the consumer has to visit the store/website again, which increases the likelihood that they will purchase more merchandise. This is a win for the retailer.
• Buy 1 product + another product in an adjacent category and receive a discount—Auto parts stores will use this one to stimulate sales of motor oil. Bundling a lubricant with an oil filter generates more volume for the retailer when both can be purchased at a lower cost together versus separately.

Discount Strategy

How do retailers (or product manufacturers) determine which discount to use, if any? Typically, discount approaches are based broadly on (1) previous experience and/or (2) consumer research.

Retailers and manufacturers alike plan discounts throughout the year somewhat on autopilot. “If it’s back-to-school season, it’s time to discount the glue sticks!” They use sales from previous discounts/promotional activity to predict future sales. There is no question that historical sales data are helpful when planning pricing actions. However, if something changes in the market (disruptive new product introduction, economic downturn/upturn, geopolitical unrest, unstable weather patterns), historical sales data will have a difficult time forecasting. Under these circumstances, the predictive accuracy of historical data can be augmented or even replaced with consumer feedback.

Primary research provides a future-looking perspective about how well discount strategies might work. The forward-looking perspective is useful when considering a new discount or promotion tactic. There are myriad pricing research methods, also suitable for understanding discounting, that can provide a window into future performance. Choice modeling, also known as choice-based conjoint, is the most effective in optimizing discounts and promotions, even if they do not exist in the market today.

Some Examples Of Utilizing Choice Modeling

As an example of choice modeling in action:

• A manufacturer of ready-to-drink (RTD) beverages sold in convenience stores wanted to increase sales during the “off-season.” Several discounts and promotions were considered to encourage more purchases. The company had not used some of the promotions, so there were no historical sales to bolster confidence in their outcome. Primary research was conducted to test these discount/promotional ideas. Using a choice modeling framework, various RTD beverages (competitive and client products) were presented to convenience store shoppers in an online survey. Consumers evaluated several screens (purchase scenarios) and made purchasing decisions. Pricing, discounts, and promotions varied across the screens according to a carefully constructed experimental design. From the purchases made on each screen, a model was developed that predicted sales for each product under different discounting and promotional conditions. Sales of the client’s beverages increased based on the best promotions identified by the research.
• Another manufacturer, faced with a similar business issue, leveraged choice modeling to determine whether margins would be higher by just reducing prices or by implementing $XX off promotions. In the online survey exercise, consumers evaluated screens of products shown with prices and promotions. One product was purchased on each screen. A model was built that predicted a product purchase rate at each price and promotion tested. Market simulations using the model revealed that the $XX off promotion generated significantly more margin than did the simple price reduction, even though the net cost to the consumer was the same. Although the outcome was not surprising, the size of the relative margin increase was eye-opening. Based on the consumer research, the manufacturer confidently moved forward with an in-market test of the optimal promotions.

Good Deals

Discounts and promotions are common tactics used to energize sales. Getting a great deal makes consumers happy, and happy consumers buy more products. Theoretically, this translates into more margin for retailers and manufacturers; however, not all discounting/promotional strategies produce desired results. New tactics can be risky, yet retailers often rely on past experience (sales data) to predict performance. Choice modeling research yields valuable insight into consumers’ future purchasing behavior when markets have changed or sales tactics have no prior history. Empowered with this intelligence, companies are in a better position to predict discounting/promotional performance.

Elizabeth Horn

Senior VP, Advanced Analytics

Beth has provided expertise and high-end analytics for Decision Analyst for over 25 years. She is responsible for design, analyses, and insights derived from discrete choice models; MaxDiff analysis; volumetric forecasting; predictive modeling; GIS analysis; and market segmentation. She regularly consults with clients regarding best practices in research methodology. Beth earned a Ph.D. and a Master of Science in Experimental Psychology with emphasis on psychological principles, research methods, and statistics from Texas Christian University in Fort Worth, TX.

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