something to think about when looking at sale ads

I am conducting a behavioral economics experiment for one of my classes. I decided to test buyer behavior in respect to the most effective sales promotion. The main set-up of my experiment is as follows:

The customer is purchasing a 40” Sony television from a large electronics store. The list price of the TV is $1,000.00. The buyer has three options regarding the purchase.

Option 1: Purchase the television at a 15% discount (a savings of $150)
Option 2: Purchase the television at the list price, but receive a $200 store gift card
Option 3: Purchase the television at the list price, but receive a free gift valued at $200
(iPod touch, 12MB Canon digital camera, or Samsung Blueray DVD player)

As I suspected, the majority of respondents chose Option 1 or 2. In fact, approximately the same number of people chose Option 1 as Option 2.


Of course, that was only phase 1 of my testing, and the next results were very surprising. I decided to conduct the same test again, but this time, I eliminated the third option. A logical conclusion, based on prior results, would be an even split between the two options; however, that was not the case. An overwhelming majority of the respondents chose Option 1 – the discount.

The reason: when faced with two “gift” options versus the one discount option, people were more swayed toward the gift. Needless to say, I was ecstatic to observe these results. Honestly, studies like this are the reason why I love economics.

From a store’s standpoint, giving a discount is the most expensive option. As the price of an item is reduced, the profit margin falls. The free item is a reasonably good option for a store. They secure a sale with the “free gift” and only lose the cost of the free gift. Since the store chooses the free gift, they can purposely choose items with the largest profit margins. The gift card can be a toss up. On one hand, the customer can purchase an item like a video game system in which the list price is below cost. There is always the possibility of the customer losing the gift card. However, the most lucrative situation is also the most likely result of offering a gift card – the customer will reenter the store after the original television purchase and spend more than the value of the gift card, resulting in even higher store profits.

In order to further determine how much the free gift offer sways the consumer, I plan to execute one further test, but this time, the purchase will be less expensive. I want to test whether the same results occur when the item is only $200.

More results to come…