On the Profitability of Stacked Discounts: Identifying Revenue and Cost Effects of Discount Framing

Previous research demonstrates that stacked discounts increase retail revenue. For instance, a retailer should sell more products by offering “20% off, plus an extra 25% off” than by offering an economically equivalent single discount of “40% off.” We conduct multimethodology research to investigate a potential downside of offering stacked discounts: Can stacked discounts disproportionately increase retailer costs from product returns? We incorporate insights from prior behavioral work and develop an analytical model to generate predictions about how stacked discounts affect retail sales and return performance. Next, we conduct a laboratory experiment to provide evidence for our theory in a controlled environment. Subsequently, we empirically test our predictions under real market conditions using six-year transactional data from promotional events at a national jewelry retailer. Finally, drawing upon the empirical estimates, we conduct a numerical study to assess the impact of stacked discounts on retail profitability. Our analytical model and the empirical results identify the inherent tradeoffs associated with stacked discounts and demonstrate the cost structures under which stacked discounts will decrease firm profitability despite an increase in initial sales. We conclude by discussing implications for retailers in assessing the impact of how they frame their price discounts.