Sunday, July 23, 2017

Bank AmeriDeals and Online Couponing

Why does Bank of America want me to click on these "deals"?

One of the strangest online offers I get on a regular basis are BankAmeriDeals®.  Since I have account with Bank of America and one of their credit cards, they're constantly sending me emails telling me I have all these great deals waiting for me.  They really are not so great.

If I go to the website, and click on the correct tab, there is a list of these deals presented as a number of icons as shown above.  The deals are usually 10 to 15% off for various retailers such as Starbucks, 1-800 Flowers, AutoZone, Ruby Tuesday's, Hilton, and something called Stitch Fix, whatever that is.

In order to get one of these deals, you must check off the box on the corresponding on the list.  There is no cost to you for checking off a box (nor does it obligate you in any way), so you can check off as many boxes as you want, or just all of them.   So initially, I was puzzled as to why they made us go to the website and check off these boxes on the deals we wanted, instead of just automatically offering us these deals.

And then I realized this is an example of incidental discounting.   Incidental discounting occurs when you offer a discount as an incentive to attract new customers, and one of your old customers obtains the discount as a matter of course.  You are not optimizing your overall income from each transaction.  You are giving a discount to someone who would have paid full price.

As we learned an economics class, in a perfect theoretical retail environment, each customer pays what they feel a product is worth. Thus, Mrs. I.M. Gottrocks will pay $500 for a new widget and think it is a good bargain.  Meanwhile Larry Witetrash will pay $100 as that's all he can afford.  If each person pays the maximum amount they feel is appropriate, then you sell as many widgets as possible and maximize your income stream.

It is like the situation with outboard motors as I noted earlier posting.  Back in the day Johnson used to make a V4 two-stroke outboard offered it in 3 horsepower sizes, 85, 100, and 115 horsepower.  Each engine was the same exact size externally the only difference being changes in bore and stroke and carburation.  The parts cost and assembly cost were identical. And yet the hundred 15 horsepower model sold for an awful lot more than the 85 horsepower model.

And this struck me as odd, as a young man, because I wanted the 115 horsepower model, but wanted only to pay for the 85 horsepower model.  But what was explained to me, was that they're not selling engine parts, they're selling horsepower. And when I was working at Carrier we had the same situation with industrial chillers with different capacities.  The parts count and components were largely the same, and the costs were largely the same.  However we were not selling blocks of iron to our customers we are selling tons of chilling capacity and if you wanted more chilling capacity paid more money.

Thus, there is this entirely irrational relationship between the price of things and the cost of things that most of us don't realize.  As consumers we think that larger things should cost more, smaller things should cost less, even if they both cost the same to make.  But not only that, we all expect the same pay the same price for goods in an egalitarian democratic society.  However from an economic point of view, it makes a lot more sense to sell rich people things at a higher price and poor people at a lower price.

And if you read that last sentence very carefully, you'll see one the keys to getting head in America as a middle class person.  Live what I call the Walmart lifestyle, buying things at the low price rather than paying the Whole Foods lifestyle price.  Yes, a surprising number of Americans prefer to pay high prices, as they perceive a status in shopping at certain stores.  And some people can truly afford to overpay for things as they are Millionaires or Billionaires.  But a lot more of the people shopping in these upscale stores are nearly strivers who want to appear to be wealthy and spend what little income they have on overpriced Goods.

But getting back to discounts and couponing, I wrote one of the original patents on internet couponing for a client and I learned it off lot about the couponing business.  Coupons have a number of uses.  One is to entice people to buy products that they might not ordinarily buy, either because they are really can't afford them, or they are not aware of the product.  Another use of coupons is to get people who cannot afford to buy your product to buy it on regular basis using the coupon.  In other words, coupons allow you to provide a range of pricing for different consumers.  A third reason is to obtain "conquest" customers who are loyal to other brands, who may be induced to switch by a coupon deal.

Mrs. I.M. Gottrocks goes to the upscale supermarket and buys her Tide laundry detergent and pays full price.  Larry Witetrash clips the coupon and buys the same Tide detergent, but pays a far lower price than Mrs. Gottrocks.  The net result is that Tide sells two boxes of detergent rather than one, even though they don't make as much money off of Larry, they still make more money than they would if the box just sat on the shelf and Larry bought store brand.

And this works fine in the paper coupon environment, as Larry has to go to the trouble of buying the newspaper, finding the coupons, clipping the coupons, saving the coupons, and presenting the coupons which is a hassle.  You make Larry work for that discount and he doesn't get the discount unless he does the work. Not only that, Mrs. Gottrocks doesn't get the discount because she views clipping coupons is beneath her and a waste of time (which is largely is). So she doesn't get the coupon discount.

With internet or online coupons, the problem arises that if you offer discounts to everyone via a simple click, that everybody will get the discount whether they really deserved it or not.  That's the incidental discount that arises where people like Mrs. Gottrocks end up getting a discount on items and services, and the retailer doesn't get the advantage out of the bargain as they had in the past.  Sally would have bought the product anyway, so they are not getting a conquest customer for another brand.  And Sally would have been happy to pay the higher price so they're not selling an additional box of detergent to Sally that otherwise would have sat on the Shelf, they were just selling it in the lower price and thus come out behind on the deal

How do you avoid this problem?  One way that Bank of America uses is to force you to go on to the website and click on the icons.  It seems like a pretty stupid waste of time until you realize that it forces the consumer to look at these deals and remember the physical act of clicking on them which creates a psychological tension in the brain.  Now, the next time the person drives by a Starbucks they will think to themselves, "Gee, I get 10% off on Starbucks! I should go in there and buy a cup of coffee even though I'm not really in the mood for coffee!" And you might laugh at that last statement but a lot of people actually think that way.

Even worse, Bank of America sends emails reminding of these deals are expiring, further prodding you psychologically to use these virtual coupons.  There are a lot of people in the world who feel they're missing out on a bargain if they don't use a coupon before it expires.  I recounted before how a friend of mine was at Michael's one day running around the store looking for something to buy because the coupon was set to expire that day.  She was going to buy things she didn't really need or want, just to take advantage of a perceived bargain.  This was a total of victory for the store.

So yes as stupid as it sounds, there are people who not only will click on the coupon for Starbucks and then get the coffee that they don't want because they perceived they are getting a value, but those who will think, "Gee I should use the Starbucks discount before it expires today, and buy a coffee even though I'm not in the mood for coffee!"  People are that stupid.

It's also a sneaky way for Bank of America to put advertising into their banking website and also spam you via email for third-party vendors.  Since you're not about to shut down emails and blacklist your own bank (you want to receive important notices from your bank)  you are allowing the flow of data into your life that advertises for other companies.  Moreover when you log on to their website, these advertisements - and they are advertisements - appear for these other companies in the form of these "deals" you are reminded about.  You go to the deal page, and click on these things and they know that you've clicked on them and tell their affiliated advertisers that you actually clicked on these physical icons showing an interest in the product.

It may sound like a trivial thing, but Bank of America probably makes enough money off of this to pay for the entire operation of their website, which by the way was crashed for almost four hours yesterday.  And by offering "discounts" they come across as the good guy finding and scoring deals for their loyal customers rather than as a heartless advertiser who is flinging commercial messages into their face whether they like it or not.  Pretty clever shit, that's why I own stock in Bank of America.

I did mention in passing earlier that couponing is a waste of time.  I covered this before with several postings on this site.  The reason why couponing is a waste of time is that Mrs. Gottrocks and Larry Witetrash might both by The Tide detergent, with Larry using his coupon.  However both of them could find a better deal by buying store brand detergent, which is often just as well and it's always priced lower than the name brand, even with coupons.

"But Bob, what about all these extreme couponers we see on television?\" They have garages full of food neatly stacked on racks they all got for free! Sometimes they even get money back!" That is indeed true, but these are often stunt buys.  They save up coupons over time and cash them all in at once at stores that offer double coupon days, coupon stacking, or other discounts and get amazing bargains.  However, in order to get any of these coupons, they actually had to buy product in the past. So you are not really getting a free bag of dog food if you had to buy 5 bags of dog food to get the coupons.

Moreover, the weird fascination these extreme couponers have with carefully storing and sorting their "coupon wins" in racks in their basement or garage is somewhat disturbing.  This is not so much shrewd purchasing as it is merely hoarding.  And it strikes me as odd that some of these people will obtain these products via coupons and then keep them displayed on these racks, but never actually use or consume the products.  I think the conquest part of the deal is the entire deal for them, and having racks of products and showing it off to their friends and bragging about how they got all this stuff for free is the real payback for them.  In other words it is a form of status seeking. A form of status seeking that actually costs you money like most forms of status you can, and could lead to hoarding disorder later in life.

Couponing in the internet age is an interesting sport. And it's interesting to see the techniques people are using to prevent giving discounts to people who were not seeking discounts.  And the way of granting coupon discounts and distributing them is also very complex.  I'm sure you've been to more than one website where at the checkout they say "please enter coupon code here."  And if you open another window and search online, sometimes you can find these coupon codes at various websites. Again, another example of incidental discount.  You are already in the process of checking out and willing to buy, and they just gave away 10% for no reason at all.

And possibly coupons and their ilk could disappear as a result of this.  Maybe we will go to a more egalitarian pricing model and perhaps we already have.  But so long as they are people willing to pay more for the same product than others will, retailers will continue to figure out ways to offer the same or similar products, for different prices for different buyers.