Ads, Coupons, & Savings

When I step out of my home every afternoon to get the mail, I end up finding a lot of ads and coupons in the mailbox.  Some, like those in the grocery circulars, I actually kind of enjoy looking through, and will plan our shopping around them.  Others though, like the "Money Saver" envelope stuffed with fifty different companies' inserts, seem like a real waste of resources.  I'm sympathetic to the marketing needs of our local small businesses, and I'm sure direct mail does a lot of good for them.  But there's something about coupons that I really dislike: the way they purport to save money.

Some stupid semantics...
Sales and coupons, by definition, can not "save money" in the traditional sense.  These marketing techniques have one goal: to get someone to spend money, not save (as in "invest" or "not spend") it.  Even a free item has the aim of costing money over the long haul, as the supplier hopes you'll integrate that product into your purchasing habits.

At their best, sales and coupons can result in a cost avoidance.   At their worst, sales and coupons result in additional & unnecessary spending on transactions that simply would not have happened without the promotion.  But, and this may be the annoying English major in me, the part of coupons that really gets to me is their twisting of the word "save", when coupons and sales aim for the exact opposite behavior: to spend.  Savings rate generally hover in the low single digits in this country and I have to wonder if it's partially because of our odd modern use of the word.

There's savings, then there's savings...
Semantics aside, coupons do result in a particular form of savings.  Cost avoidance is a term that has some varied definitions but is essentially lowers or avoids a future cost (with the future, yet-to-be-realized-and-not-yet-discounted cost used as the baseline).  That is, if I don't currently have any television subscription service, and I sign up for Dish Network because of a coupon that gives me a 50% discount ($30 off the list price) for 24 months, I have achieved a cost avoidance of 50% (or $720 over 2 years).

By comparison, a "cost reduction", like it sounds, reduces one's current costs (with current costs as the baseline).  So if I already am paying $60 a month for my Dish Network service and I use a coupon to achieve a 50% ($30 off list price) savings, then I have achieved a 50% (or $720 over 24 months) cost reduction.

You've probably noted that the end result in both examples is identical: both families get the same t.v. service for the same price.  So, why bother with the distinction?  The difference in what you choose as a baseline: current costs or future costs.  In the first example, the family is spending $30 more every month after using the coupon, and in the second the family is spending $30 less after using the coupon.  In the second example, the family has a hard cost reduction which actually allows them to save (i.e.- invest) $30 more every month going forward.

Habits & Logical Fallacies

Getting consumers to use a product habitually is something like the holy grail for manufacturers, because once a habit loop is established it's more or less there forever.  The behavior in the loop can be changed, but the loop itself (cue, behavior, reward) is permanent.  As outlined in The Power of Habit, Claude Hopkins was a pioneer in advertising and was one of the first to successfully create habit loops for products via a series of advertising rules.  The rules centered on the idea that a habit can be formed by establishing a cue and a reward, with a the desired activity in between.

If a supplier manages to get a customer to make the purchased service or product a habit (say, via a coupon offering a discounted price in exchange for a 2 year subscription, or a coupon requiring the purchase of greater quantities of a product so that multiple uses are more or less guaranteed), that customer is now potentially subject to a the Sunk Cost Fallacy.  When you've invested a certain amount of time or money into a product or service, we are less likely to give up on it, even if it sucks and we no longer particularly like it.  The longer we use a service or product, the more we have "invested" of ourselves (our money and our time), and the less likely we are to give up on it, even if we recognize it's a bad deal for us.

Other biases come into play as well once we've purchased something, such as the effect of branding.  Because we consumers derive some of our sense of self based on the products we buy, we will defend the products we purchase to keep our identity intact.  The coupon is often the first introduction to a new brand: it is the mechanism by which many new products are tried for the first time.  Once purchased, if the product is really enjoyed, the seeds of brand loyalty are planted.  Thanks to trying out a new product, you are now the type of person who enjoys Lucerne cheese singles: a classy person, at least a little classier than one who buys off brand.  Even if a better, less expensive product is tried later, your mind automatically tries to defend your past choices and preference for the established brand.  We can see this branding effect in a Baylor study on Coke and Pepsi, in which subjects' prior identification as someone who likes Coke actually resulted in scrambled pleasure signals when drinking Pepsi, to validate their preference for Coca-Cola.

A coupon itself relies on the Anchoring Effect. With a coupon or a sale, a higher initial price is suggested, to which a deep discount is then offered via the deal.  It's a psychological trick, in which the first piece of information given to your brain (this suit was originally $1,000!) affects your future decisions (65% off of $1,000...how can I afford to pass this opportunity by?).  The anchored price and the subsequent discount changes the perception one has on the suit: it's not just a $350 suit, it's a $1,000 suit being offered for a short time at an incredible deal.  The discounted amount itself, $650, taps into our loss aversion: we don't want to let the expiration date pass and lose those discount dollars.  (More on that in a bit.)

The counterargument...
A counterargument is that coupons are only used for items we would have purchased anyway.  I always buy Trader Joe's pasta sauce or a particular brand of cereal or what-have-you once every two weeks, so the coupon is simply making my regular purchases more affordable.  It's fitting organically into my normal purchasing behavior.

But this concept of what one would normally purchase is very hard to define or validate.  We certainly can recall purchasing a specific item in the past, but humans are not very good at remembering details like how often that item is purchased on a yearly or monthly basis.  Because of the coupon's expiration date, you can not always wait for the "natural" purchase time.  Would this purchase have happened in the same quantities and in the same time period as the coupon indicated?  A 1994 study published in the Journal of Marketing Research found that consumer behavior is affected by expiration dates.  Consumers are "[d]riven by a desire to avoid the loss of expired coupons, thereby inducing an increase in redemptions near the expiration date."

And who is more likely to redeem these coupons right before the expiration date?  Not the novice who occasionally clips a coupon.  It was the heavy coupon users:  "[i]nterestingly. results of a binomial logit analysis suggest that heavier users of coupons are significantly more likely to redeem a coupon that is about to expire and to be bothered by allowing a coupon to expire unused."

The savvy consumer vs. the army of businesses and marketers...
Businesses know the costs of advertisement & coupon printing, and typically only continue to utilize this marketing if they see results in the form of increased revenue.  We know that, on average, coupons should result in increased sales revenue for businesses, and thus more money spent by consumers.  On this front, almost all of us ironically think we are in the minority.  We are not the people who are affected by schemes like BOGO (and the increased cost on the paid-for item), or who fall for anchoring, or the people who are not entirely aware of their habits, or whose bottom line is actually increased by coupons or promotions. We are the savvy people getting one over on the business and gaming the system.  Logically speaking, this can only be true for a small segment of people using the coupons.  So why am I sure that I am in the minority?

People are often not very good at understanding their purchasing behavior, or much of their behavior at all. We have cognitive biases, and they are many.  In the battle of you, the individual consumer, versus the veritable army of businesses and marketers, who is the favorite?

*Photo is from Chris Potter at Flickr Creative Commons.

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