A leading marketing agency suggested that the maximum share of your product's marketing budget should be kept for discounts, deals and offers.With this impression in mind, we began to define our promotional strategy centered around Coupons and discounts.

We all love incentives, discounts, don't we ?My story of discounts will not only present the perspective of consumer but will also include the perspective of brands and offer designers.

I went to buy the sports shoes at a well known brand outlet.Checking out various options, I spotted a vibrant fluorescent shoe that caught my eye, not only for its unique neon and white color combination and shape but also it seemed quite comfortable in my trial.I examined it closely from all sides, and I discovered it perfectly fits my needs.

And finally I looked at the price, which was sky-high but honestly, the creativity was worth every penny.But sadly, my budget couldn't afford the masterpiece, which left me feeling a bit disappointed.

I took a deep breath and began to explore other possibilities, that was more budget-friendly.

After a few minutes, the store girl approached me saying that, Congratulations ma'am.You're our lucky customer, and we want to spread the joy by giving you a special offer of 50% discount on that beautiful pair of shoes.

50% on premium item is huge.I wish this was a true story, but in case of an offline store, it's not possible to offer a tailor made discount to an individual, system will not allow that.

Dynamic Discounts in Online Store

Now let's recreate my story with an e-comm site or an online store.

I liked the piece but because of heavy price I kept that piece lying in the cart without making the payment with an intention to buy it when I have enough funds.Many of us do that right ?

Discounts on E-comm platforms

E-commerce firms equate unrealized revenue with lost revenue.This means that products that have been added to the cart but not purchased in a long time are considered a ‘losses’.

So, to deal with losses, the ecommerce businesses, specially in Fashion category, offered 40 to 50 percent discounts on the products in the cart that were over 30 days old.

These were sent as direct push notifications to users.The promise was that since the buyer had shown strong intent to purchase the product , there was high probability that, given a considerable discount or incentive, the user would buy the product at the now heavily discounted price, with the e-commerce firm funding this discount.

Moreover, it helped these startups achieve sales targets and increasing the Customer Lifetime Value or CLTV — a key metric for e-commerce performance.

The strategy worked particularly well in the initial days.That is, until the consumers figured out the pattern.

How many times you have faced a situation where you try to solve a problem, creates another problem.

I have seen this in Software world, where we try to fix a bug, to introduce 3 to 4 new bugs in to the system, and that is referred as Cobra Effect.

The Cobra Effect

In the days of the British Rule, the government of Delhi found that there were plenty of cobras in the capital.In order to prevent the deaths of locals from these venomous serpents, they came up with an ingenious idea to curtail the cobra population.

They launched a bounty program wherein citizens would be rewarded with cash when they brought in dead cobras.The result?Lots of dead cobras.

Problem solved… or so the British thought!Unfortunately for the British, the bounty program started to backfire.The enterprising locals started breeding cobras to make more money.

The Brits finally admitted their mistake and gave up on that silly plan.That led to the locals releasing the now-worthless cobras back into the city, leading to a higher population than before the snake bounty was announced.

This later referred as the Cobra Effect , a type of perverse incentive, which is a phenomenon that occurs when an incentive driven attempted solution to a problem actually makes the problem worse.

The Cobra Effect of Discounts -

The offered discount on pieces lying in the cart acted as Cobra Effect to E-comm businesses.

Because now the enterprising customer has decoded the pattern that cart items over 30 days will have huge discounts.

Before buying a heavy priced item, as a customer I just need to ask a question “is this product worth waiting 30 days for?” It surely did for the fashion category at least to avail a huge discount.

What happened here is that users who would have otherwise bought the product at the regular price (and immediately), were now willing to wait for 30 days or more to receive a massive discount on that product.This strategy initiated by e-commerce firms therefore ended up altering consumer behavior permanently.

As now, waiting for 30 days appeared more economic leading all fashion brands consumers to not buy anything upfront, causing a huge loss to Fashion Industry.

Conclusion 

Policies that seem entirely sensible can lead to unintended – and sometimes unpleasant – consequences.

Research has shown that the incentive scheme may seem to work for a short period of time, until the flaw is exposed and eventually exploited, further compounding the original problem.

In the real world we see relatively little effort to test whether a past intervention has led to a ‘cobra-effect’

Several such newly compounded problems crop up because the incentives drawn up by the party initiating the action do not take into account all the possible outcomes of the reactive party’s actions.

To change human behavior is quite difficult and requires time and many trials.

Is there a solution to prevent it?Yes.Any policy which is to benefit the consumer should always target to motivate them, not appease them directly.

My team and I are still figuring out the best possible deal offer for our product, we'll share final plan in my next post.

Till then, happy shopping and keep enjoying your discounts.