Promotions that involve spending a certain amount at a store to get a gift card may make you spend more than you normally, report researchers.

This is thanks to a phenomenon called “mental discounting.”

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“Price promotions that feel too good to be true are always an opportunity for consumers to take an extra moment for reflection,” says Cynthia Cryder, associate professor of marketing at Washington University in St. Louis’ Olin Business School, author of a new paper that will appear in the Journal of Marketing Research.

“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?”

With certain price promotions, such as a receiving a gift card to spend in the future, consumers mentally deduct the gift card’s value from the initial purchase as well as from the second purchase when they use the gift card. Multiple mental deductions based on a single price promotion result in consumers’ perceptions that their costs feel lower than they actually are, and can increase spending, Cryder says.

“Consider a situation in which a college student purchases a $900 Macbook and receives a $100 gift card to spend in an Apple store in the future,” Cryder and coauthor Andong Cheng of the University of Delaware write in the paper.

“Feeling confident that 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.’

“Now imagine that later, the student is back in the store purchasing a $300 iPad. At this point, she applies the $100 gift card, resulting in a final $200 charge for the iPad,” they write.

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“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 $1100 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.”

According to industry research, Cryder says, businesses will load $14.5 billion onto promotional credit offers in 2017, triple the amount from 10 years ago.

“These promotions create opportunities for retailers, and consumers should carefully consider these offers before taking advantage of them,” Cryder says. “Although consumers might feel like they are spending less, these offers can sometimes encourage them to spend more.”

Source: Washington University in St. Louis

Original Study

Article by Neil Schoenherr-WUSTL - Futurity