Now that the holidays are in full swing, you may start to see more promotions advertising gift cards or promotional credits in exchange for heavier spending. Rather than slash prices, many retailers now lure new customers with targeted promotions, such as: “Spend $100 and receive $20 in store cash” or “Buy three items and receive a $5 gift card for your next visit.”
These offers are enticing to budget-minded consumers who like to get as much as value as possible from their purchases. But be careful: research shows these types of promotions also tempt people to spend more than they would otherwise.
“These promotions create opportunities for retailers, and consumers should carefully consider these offers before taking advantage of them,” said Washington University professor Cynthia Cryder in a news release. “Although consumers might feel as if they are spending less, these offers can sometimes encourage them to spend more.”
A forthcoming study co-authored by Cryder in the Journal of Marketing Research found that promotions offering free gift cards or store credits in exchange for spending are even more effective at getting people to pile additional items into their shopping carts than traditional discounts and rebates.
The key to their success? Store credit often makes people feel as if they are getting a bargain on multiple purchases, rather than just one. “Promotional credit allows consumers to feel they spend less than they actually do – a good feeling,” wrote Cryder and co-author Andong Cheng in the paper. “However, this also may allow consumers to justify unwise spending.”
For example, when people take advantage of a gift card in exchange for spending, they assume they saved money on their first purchase by receiving a credit they can use later. They also tend to use fuzzy mental accounting when they return to shop again, gift card in hand, and mentally apply those savings a second time – this time, to a different purchase. Because gift cards tend to make people feel as if they have money to burn, people will also use them as an excuse to buy additional items.
To illustrate their point, Cryder and Cheng asked readers to imagine a college student who visits an Apple store and is promised a $100 gift card after purchasing a $900 laptop. “Feeling confident she will use the gift card, the student may mentally reduce the laptop cost and think: ‘I am spending only $800 (instead of $900) on this laptop because I am receiving $100 worth of credit back in my pocket,’” wrote Cryder and Cheng.
Then, when the college student returns to the Apple store and is tempted by a $300 ipad, “she may think: ‘I am spending only $200 (instead of $300) for this tablet, because my gift card covers some of the cost. In total, this consumer has paid $1,100 for the laptop and tablet, yet, because she mentally applied the price promotion to both purchases, she may feel as if she paid substantially less.”
To test their theory, Cryder and Cheng conducted a series of lab experiments and found this scenario happens frequently. People often overlook the true costs of their purchases when they feel, subjectively, that they are spending less money.
I am guilty of this, too. As a serial bargain hunter, I’ve long been a fan of the $10 in Kohls cash I receive each time I spend $50. As Kohl’s recently touted in its Black Friday advertisements (which offered people $15 in Kohls cash in exchange for spending $50), it feels as if I’m “getting paid to shop.” The problem is that I always end up spending far more than $10 when I return to use up my cash. Being offered $10 in store credit gets me to visit the store in the first place; having another $10 to burn when I return gives me an excuse to purchase the pricier clothes that I want, but don’t really need, because I feel as if I’m saving money on them.
According to Cryder, I’d be better off thinking through how much I’m spending before I jump on a promotion. “Price promotions that feel too good to be true are always an opportunity for consumers to take an extra moment for reflection,” said Cryder in a news release. “Instead of thinking about how much money they are ‘saving,’ consumers might want to stop to ask themselves: How much am I actually paying for this product, and am I willing to pay that much?”