Being lured into purchase

THE VALUE OF DISCOUNTS COLLECTED VIA A PROMOTIONAL CODE IS GROWING BUT THE SUSPICION IS THAT THEY ARE EXPLOITING CONSUMERS' BEHAVIORAL BIASES. AN EMPIRICAL STUDY EXPLAINS WHY AND HOW

by Matthias Rodemeier, assistant professor at Department of finance

Claimable rebates are the most ubiquitous promotion tools in online shopping. Consumers are offered a promotion, say 10% on everything, but the price reduction is only applied if the consumer enters a promotion code during the checkout process. Industry experts estimate that the total value of digital rebates that have been redeemed was $47 billion in the United States in 2017. This number is projected to increase to $91 billion in 2022.
Despite the large potential benefits to households, consumer protection agencies suspect that rebates are used to exploit behavioural biases. The hypothesis is that rebates attract consumers even though many eventually forget to claim the discount. In the same spirit, the behavioural economist and Nobel laureate Richard Thaler once referred to these promotions as “buy baits.” Marketers and proponents of rebates, on the other hand, claim that consumers know very well whether they will redeem the rebate when they decide whether to make a purchase. Those who don’t redeem simply do not care about the promotion. At the heart of this discussion is a fundamental question in behavioural economics: If consumers face behavioural biases, such as forgetting to redeem a rebate, do they anticipate these biases?      
To answer this question, I run a field experiment with over half a million consumers in a large online shop that frequently offers rebates to consumers. In one experimental condition, consumers are offered a standard rebate that requires active redemption. In another condition, consumers receive a simple price discout that is automatically applied to the purchase value for everyone. The idea behind the experiment is simple: If consumers anticipate that they might fail to redeem, the rebate should increase sales less than the automatically applied price discount.

I find that only around half of all consumers that are offered a rebate manage to redeem it. Thus, simply requiring consumers to redeem the rebate themselves prevents many from receiving the promotion. However, many consumers anticipate this issue: The increase in sales caused by a rebate is only two-thirds of the increase in sales caused by an automatically applied discount. This is evidence that a substantial share of consumers is aware of their biases that prevent them from redeeming the rebate and, as a result, decide not to purchase in the first place.  
Through additional experimental variations, the study shows that the increase in sales caused by rebates is still excessively large. The underlying mechanism is that consumers correctly anticipate their likelihood of forgetting rebate redemption but they vastly underestimate the hassle required to redeem it. In particular, I find that the firm can increase the hassle of redeeming the rebate, which reduces redemption rates, without sacrificing sales. 
By comparing profits across promotions, the study finds that rebates are 150% more profitable than simple price reductions that apply to all consumers. These results may explain the ubiquity of rebate promotions in online shopping.

The results also directly inform consumer protection policies in the US and countries across the globe. Policymakers have substantially regulated the features of rebates due to the suspicion that consumers confuse rebates with simple price reductions. Despite the ubiquity of rebate laws, there is little evidence supporting this claim. This study provides the empirical foundation for these widely used regulatory policies and substantiates the underlying motivation. An additional insight from the results is that it may not be sufficient to require firms to remind consumers to redeem the rebate. The reason is that consumers already have a good idea about whether they will remember redemption. Instead, they underestimate the effort required to redeem. More invasive regulations that restrict the use of rebates or impose the burden of redemption on the side of the firm may be called for.