Studying 1 million Alibaba users, Hengchen Dai mostly confirms the transactional nature of internet retailing
Products sitting in our virtual shopping carts present a challenge for online retailers. They’re just a big “maybe” until we hit the Buy Now button.
Dennis J. Zhang and Lingxiu Dong of Washington University in St. Louis, UCLA Anderson’s Hengchen Dai, and Fangfang Qi, Nannan Zhang, Xiaofei Liu, Zhongyi Liu and Jiang Yang of the online retailing behemoth Alibaba Group document in a working paper that offering a discount to shoppers with items in their carts can close the sale.
In a one-month 2016 field experiment of 1 million users of the Alibaba mobile online platform, shoppers who placed items in their shopping cart and then received a discount coupon (median price cut of 13 percent) were 116 percent likelier to push the “buy” button than shoppers who didn’t receive a coupon for items in their shopping cart. The doubling of purchase probability included coupon recipients who didn’t navigate back to the site in the few hours the coupon was offered. When focusing solely on the two-thirds of coupon recipients who actually saw the offer, the probability of making a purchase jumped 173 percent.
That doling out discounts triggers more conversions isn’t surprising. But does a one-time discount change how shoppers behave going forward? Are they more inclined to shop on the platform, perhaps feeling friendlier to the retailer? And, important for narrow-margin retail businesses, once given a coupon, are customers conditioned to expect a discount on future purchases?
As long as stores have existed, it seems, the retail industry has had a love-hate relationship with all forms of discounting, including coupons. They stimulate sales, to be sure, but some retailers, notably JCPenney, became so reliant on discounting that margins were flattened. In the internet age, testing shopper responses is faster and easier to document more reliably. So, the study of discounting continues.
After the month spent watching how coupons influenced Alibaba transactions, the researchers continued to track the shopping habits of consumers who had been given a coupon in the initial stage.
Consumers who previously received a shopping-cart-specific coupon viewed 0.53 percent more products in the month following the coupon experience, compared to consumers who did not previously receive a shopping-cart-specific coupon. That is a small but notable boost in engagement.
With the sweet memory of the shopping-cart discount still fresh, consumers increased the proportion of products they put in their shopping cart by 0.41 percent. If it worked once, why not keep trying?
It was not a huge bump, but on a massive platform like Alibaba, and based on such a large data set, a notable result. The increases in engagement, or at least interest, were more notable than the improved pricing the customers extracted from the platform. The researchers found that for the same items, the shoppers who’d received coupons paid just 0.02 percent less than those who did not get coupons, in the month after the coupon treatment.
They write, “Price changes through coupons will have both a positive and negative long-term impact on customers’ behavior: While receiving coupons will make customers more engaged on the platform in the long run, it may train customers to be more ’strategic‘ when making future purchases.”
The study roped in 11,000 retailers across two of Alibaba’s major platforms. The increased daily views of products and increased frequency of adding products to the shopping cart were felt across all retailers, not just those who offered coupons in the initial stage.
That spillover effect got Alibaba’s attention. After digesting the research, Alibaba became “more cautious about launching other targeted promotion programs,” the researchers report. The firm chose not to expand the shopping-cart coupon program aggressively. At the researchers’ suggestion, Alibaba began to consider finding non-monetary incentives to compel shoppers to buy what’s in their shopping carts.
Associate Professor of Management and Organizations and Behavioral Decision Making
About the Research
Zhang, D.J., Dai, H., Dong, L., Qi, F., Zhang, N., Liu, X., Liu, Z., & Yang, J. (2018). How do price promotions affect customer behavior on retailing platforms? Evidence from a large randomized experiment on Alibaba.