Wednesday, July 10, 2013

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 HabitClaude 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, 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.

Next Post: Why We Take Navy Showers>>

<<Previous Post: When it's Hot, Go Slow        


  1. This is a fantastic post! I seldom use coupons because my basic feeling is that if it's got enough of a marketing department behind it to actually print a coupon, it's probably not something I should be buying anyhow!

    I think I am the "odd duck" when it comes to this sort of thing however. Unlike most folks, my eating decisions are governed much more by what's least likely to send me to the emergency room (food allergies) than they are by what I think might taste good, and I have to cook pretty much everything from scratch so I know exactly what's in it. They don't tend to print coupons for ingredients, only processed foods.

    Since March I've been doing a food stamp challenge where I'm trying to keep my food spending at or below the food stamp level ($137/month in my state.) It's certainly been an eye opening experience, and has taught me to look at grocery shopping in a whole new way. I think the most valuable lesson I learned was the importance of keeping a "price book" so I know what things usually cost. That way I can tell pretty quickly if something really is a good deal or not!

    1. That's a pretty cool challenge. I know our grocery spending isn't where it should be, but I really admire those who can push their monthly spending down to that level like you & Debt Free Diaries are.

      The price book is another good habit that I generally keep in my head but, drawing from the lessons in my own post, I ought not rely on my brain..

      Thanks for the kind words and your blog makes me laugh! 38 mph is no joke...I wonder if I've even gone half that fast. :)

  2. I don't really bother for coupons unless it was something I was looking for in the first place whether it be food or clothing etc. I don't like when people justify a purchase by saying it was on sale so I got it. May question is did you need it? Did you have plans to get it anyway or did just seeing that you have a coupon to save 20% push you over so you bought it.

    We buy in bulk for food as Sam's and I only buy whats I have on the list sale or not. For clothing and other expenses its pretty much the same. When I take wifey with me though she is the coupon queen. She never lets me walk to the register without whipping out her Iphone to check and see if there is a coupon for what I am buying.

    1. That's an interesting strategy and one that might totally fit in the "I was going to purchase it anyway" approach. If your wife only brings out the coupon once you're walking to the register, we can be sure the purchase wasn't the result of the coupon. Good stuff.

  3. Yes couponing is getting ridiculous now a days, have you seen the reality show based on extreme couponers? I marvel at the great deals they end up getting, 95% off the entire bill. But 90% of the time the food is stored for months and or food that is not really healthy. Recently my supermarket is shooting out coupons right at the register, giving me 2 bucks off if I spend 10 bucks on produce. I will let you know if at my next trip to buy veggies, I can remember to bring it.

    1. I have seen those shows, and I'm torn on how to perceive them. I'm sympathetic to the frugality and effort they're willing to put into getting things for less money, but like you noted, it seems like lot of the things end up being stored bunker-style and isn't particularly nutritious.

      A coupon on produce though, that's big. With coupons like that, I think that has to be a no-brainer, even though it contradicts my post. It seems like there's a way to optimize coupons while mitigating their impact on our behavior...just got to figure out what that is.

  4. I'm wondering if you saw this article, when you talk about habits etc:

    I don't use coupons at all (they aren't as big here in aus). I do however google for them for any online purchases, with limited success. And I noticed my 'cheap' cheese in my local grocery store is $2 more than a big chain grocery store, but convenience wins for me. EcoCatLady is right though, so few 'base' ingredients go on sale - there's likely less of a margin too.

    1. Hi Sarah,

      I hadn't read that article but I wish I had. It's from the same author of the book I referenced, by Charles Duhigg. Thank you for sharing it! I think there's enough in there for a separate blog post. The amount of data, as well as the sophistication in the splicing and application of it, is incredible. The individual consumer is at a disadvantage from day one.