With the rise of Groupon and similar sites, daily deals, and extreme couponing, it's no surprise that consumers love to see—and take advantage of—dollars-off discounts. But a forthcoming article in the Journal of Consumer Research suggests that giving away products and services for free might actually increase the perceived value of those goods, more than if they were just discounted.
"Since consumers believe the value of a free product is likely to be consistent with the value of a purchased product, pairing a free product with a high-end product may very well increase perceptions of its value," write authors Mauricio Palmiera of Monash University and Joydeep Srivastava of the University of Maryland.
Perceived Value
Palmiera and Srivastava conducted a consumer study in which participants were offered a free or discounted package of spaghetti with the purchase of a jar of organic tomato sauce for $8.95. They were then asked how much they would pay for the spaghetti on its own. Results showed that customers who were offered free spaghetti were willing to pay an average of $2.95 for it, but those who were offered the spaghetti for 50 cents were only willing to pay $1.83.
According to the study, when a free product is paired with an expensive product, consumers assume it's worth more than if it was offered at a low discount. For example, if a luxury jeweler offers a free bottle of wine with a purchase, consumers assume the wine isn't cheap. The authors say consumers might also assume the same wine is cheaper if the jeweler offers it for $1.
"Promotions with low discounted prices devalue products more than free offers," they conclude. "In fact, free offers may not devalue products at all when they are paired with an expensive purchase, as consumers will use the price of the focal product to estimate the value of the supplementary product. [For example,] if Mercedes-Benz promotes a car with a free GPS system, we expect the GPS to be high quality."
Marketing Opportunities
Since many home renovation projects are high-ticket items, could Palmiera and Srivastava's research apply to remodelers' marketing plans?
Over the years, Remodeling has shared numerous stories of remodelers' tactics to get their clientele to keep an eye out for good deals. By the looks of it both discounts and giveaways can boost sentiment among potential customers. The challenge for both is to effectively manage the promotions and recover the associated costs.
In 2011, Dino Kotrides, owner of Rochester RBC, in Rochester N.Y., took in $3,750 on a Groupon promotion offering $200 worth of consultation and design services for $50. He sold 150 of the services packages and split the $7,500 sale down the middle with Groupon. Though Kotrides noted that the experiment was worthwhile for the exposure, the return on investment "isn't always there" for these types of promotions.
"About 80% of people ended up redeeming the coupon, so we ended up doing a lot of legwork, a lot of design work, and only getting about a 10% conversion rate," Kotrides told Remodeling in a follow-up interview. "We got very busy on the design side, but to a point where you can't be effective at that type of volume." Read about his experience.
Meanwhile, Christine Najem saw success with a master bathroom renovation giveaway held by her company Capstone General Contracting in Worcester, Mass. "It was definitely worth it. We got some leads from the homeowner who won the contest, and we recovered all of our costs in projects throughout the year," she recalls. "Now prospective customers know it wasn't just a gimmick, and that we actually followed through on what we said we would deliver. The next time around, I think we'll work on bringing on our suppliers to donate materials as well, to help spread the cost and give their businesses some attention as well."
To Najem's point, Remodeling editorial director Sal Alfano reminds that any discount—be it a designed promotion or shaving dollars of a margin to get a bid—needs to be recovered somewhere in order for remodeling businesses to stay profitable. And some remodelers, like Alan Hanbury, owner of House of Hanbury, Newington, Conn., stay away from markdowns altogether.
What's your approach? Have you tried a discount or giveaway that worked? What tips would you offer to other remodelers about running a successful promotion? Share your thoughts in the comments.
—Lauren Hunter is the senior products editor at REMODELING. Find her on Twitter at @LaurenHunter_HW or @RemodelingMag.
