• Price promotions, like 20 percent off a designer handbag, strongly motivate people to purchase luxury items
• Quantity-based promotions, such as buy-one, get-one, are less effective in swaying people to purchase luxury items, as such promotions induce guilt  
• Conversely, in certain situations — like when purchasing a gift – price promotions for luxury items can backfire, as they cheapen the gift in the eye of the giver

With the holiday shopping season quickly approaching, many retail businesses are hopeful for an influx of consumers bearing shopping lists and opened wallets. Black Friday (November 24), marks the day when retailers will be pushing steep promotions for their products, from the basic to the most luxurious. To help retailers better pursue effective pricing strategies, new research from Columbia Business School studied consumers’ responses to different price promotions for luxury purchases compared to those characterized as “necessary purchases.”

According to the research, entitled “The Effects of Promotions on Hedonic Versus Utilitarian Purchases,” promotions such as price discounts, rebates, coupons and loyalty programs, help consumers to justify a luxury purchase.  Additionally, the results demonstrate that promotions are more effective in driving purchase decisions when the following occur:

1. The product is luxurious and not necessary;
2. The product is framed as luxurious; and
3. The consumer’s purchase represents something they “want” versus something they “need.”

Ran Kivetz, Professor of Marketing at Columbia Business School and co-author Yuhuang Zheng, professor from the School of Economics and Management at Tsinghua University, tested multiple hypotheses and conducted several studies examining the effects of marketing promotions on consumers’ purchases of extravagant versus necessary goods. The authors proposed that, because it is difficult to justify purchases of luxuries versus of necessities, non-quantity promotions or promotions where you only need to purchase one item will have a stronger positive effect on the likelihood of purchasing luxury products.

“Spending money on a designer handbag or watch for yourself can be very difficult to justify and creates an intrapersonal conflict between the desire for indulgence and the need to save money,” said Kivetz. “By implementing the right type of price promotion, marketers can help consumers justify a luxury purchase and increase sales.”

For example, Jennifer is on the hunt for a new tote handbag that she can use for work. In Jennifer’s eyes, there is a necessity to this purchase because it’s for work. However, instead of purchasing a regular, run-of-the-mill tote, Jennifer would prefer to purchase a luxury bag that will stand the test of time. In this case, with her eyes set on extravagance, a non-quantity based price promotion, like a 20 percent off “Friends and Family” discount from a retailer will resonate best with Jennifer because it will further justify making the luxury purchase.

Additionally, the researchers also found that quantity promotions (i.e., Buy Five Get One Free), which require consumers to purchase more, are less effective in inducing consumers to buy goods, as the guilt associated with justifying additional units of a luxury item offsets the promotion.  Marketers of luxury goods or services should use an array of price promotions when selling goods which, according to the researchers, will not impact brand reputation.

Future Research

Although the present research demonstrates that promotions are effective in encouraging consumers to purchase luxury, hedonic items, future research should examine the conditions under which promotions may detrimentally affect the perceived value and brand image of luxury goods. For example, will a discounted luxury item cheapen the brand or diminish its exclusivity? Future research can examine the impact of marketing promotions on consumer psychology when it comes to luxury and necessary purchases.

About the Research

To investigate price promotion effectiveness, the researchers conducted a series of studies and experiments. In each study the participants encountered different scenarios involving a variety of products and promotions.

To investigate the impact of different promotions (i.e., coupons, discounts, rebates, etc.) on luxury versus necessary purchases, the authors constructed a conceptual framework. This was done by contrasting the effects of quantity and price promotion, followed by examining justifications for the purchase, like a gift for someone else or explaining the purchase decision ahead of time.

Source: Columbia Business School