Disproportionate redemption discounting: Mental accounting of discounted credit

Journal of Business Research Disproportionate redemption discounting: Mental accounting of discounted credit

ABSTRACT

Redeeming purchases using discounted credit (i.e., store credit bought at a lower price than its face value) is widespread, but its mental accounting implications remain unclear. This work finds that consumers making multiple redemptions on separate occasions with the same discounted credit do not perceive all redemptions as equally discounted. Redemptions made earlier in that discounted credit's spending life cycle (upstream redemptions) are perceived as less discounted than redemptions made later (downstream redemptions). This "disproportionate redemption discounting" effect occurs because users feel more certain that they can deplete their credit when they make downstream redemptions and feel like they have the freedom to mentally assign the discounted credit savings unevenly among multiple redemptions. Relatedly, individuals have higher willingness to pay when making downstream redemptions than upstream redemptions. Disproportionate redemption discounting and its behavioral consequences are unique to discounted credit and do not generalize to all store credit.

One. Introduction

Consider two consumers who each bought a one hundred dollar gift card for eighty dollars during a promotion. The first consumer redeems this entire card on a one hundred dollar item. Because her gift card was discounted by twenty dollars, she feels that she paid eighty dollars for this item instead of one hundred dollars. The second consumer instead depletes her gift card on multiple purchases across several store visits rather than in a single transaction. Does this consumer mentally divide the card's twenty dollar discount proportionately across each redemption, or does she feel that certain redemptions are more discounted than others? Factors that impact the perceived costs of these redemptions have implications on a range of consequential behavioral outcomes, such as willingness to pay and choice.

We define promotions like these discounted gift cards as "discounted credit": prepaid store credit bought at a lower price than its face value. Discounted credit comes in various forms. Stores can directly sell discounted credit to customers, such as when a gym sells a pass for five classes at the cost of three classes; hotels and airlines sometimes sell their points at a discount; Groupon and similar sites base their business models on selling discounted credit as vouchers to redeem at participating partner businesses; and finally, gift cards can end up reselling on customer-to-customer marketplaces-a billion-dollar industry in the United States. Raise.com, one online seller of discounted gift cards, attracted two million buyers in less than five years, who saved an aggregate of one hundred fifty million dollars. Despite discounted credit's prevalence in the marketplace, there is little research dedicated to how consumers interact with it, and to our knowledge, no research documents how people perceive the cost of their discounted credit redemptions.

Consumers generally purchase undiscounted credit (face value equals purchase price) as gifts to others but also habitually purchase discounted credit (face value exceeds purchase price) for themselves because using discounted credit can lead to savings. We assume that, because consumers save money when using discounted credit, consumers may consequentially perceive their redemptions as discounted. For example, if a consumer depletes a one hundred dollar credit purchased for eighty dollars on a single one hundred dollar item, she may evaluate her twenty dollar savings jointly with the redemption and perceive the cost as a net eighty dollars. However, a discounted credit applied across multiple redemptions, rather than a single redemption, results in ambiguity regarding which redemption the consumer will attribute her savings.

This research finds that, when a discounted credit is redeemed across multiple transactions, upstream redemptions (i.e. redemptions made earlier in a discounted credit's spending life cycle, when remaining balance is higher) are perceived as less discounted than downstream redemptions (i.e. redemptions made later in a discounted credit's spending life cycle, when remaining balance is lower). Consumers mentally divide the savings they earn from discounted credit unevenly across redemptions, an effect we term "disproportionate redemption discounting." To illustrate this effect, in one pretest, we asked one hundred fifty-three university students how much they perceive two twenty-dollar redemptions to cost when purchased on two sequential occasions with the same forty-dollar face value gift card (purchased at thirty dollars). We found that Redemption One's was positive (M equals eight point five four, S D equals twelve point eight seven) and significantly higher than zero (t equals one hundred fifty-two equals eight point two one, P less than point zero zero one). This suggests that individuals feel is more expensive (i.e. less discounted) than the downstream redemption despite both redemptions having identical prices and being purchased with the exact same gift card.

Herein, we document the novel disproportionate redemption discounting effect and discuss factors that drive and mitigate this effect. Because this work primarily examines how people perceive the cost of their redemptions, we next review the mental accounting literature.