MATT MUSICK

 For one day last month Amazon offered $10 gift cards for $5. Responding to an email chain about ROI, a coworker asked, “What’s the ROI on this? Looks like Amazon just gave me $5 for free.” Now this was just a conversational email but it got me thinking. Obviously, Amazon didn’t “give” him anything. He didn’t have a five-dollar bill in his hands courtesy of Amazon. In fact, he’d just given Amazon $5. But this feeling of receiving a “free” $5 was undoubtedly shared by many others. Besides the fact that he’d received nothing from Amazon, there’s an enormous difference in the company giving away five million dollars (one million cards were sold) and foregoing five million dollars of potential income. Of course, the very next email in this chain compared the Amazon card offer to Groupon. There are several problems with this comparison. Namely, Groupon deals are generally for a specific experience whereas Amazon sells almost every product on earth.  A discount on Amazon does not devalue the brand because Amazon sells everything. It also does not devalue the specific product you might purchase because the discount is associated with Amazon and not the item you purchase. On the other hand, a Groupon discount is directly associated with both the brand (let’s say a restaurant) and its products (the meal you eat). Regardless of whether new customers enjoy their meal, they will mentally anchor the price of their experiences with the discounted price they paid. Another error in the comparison is that Groupon is primarily marketed to retailers as a way to gain new customers. I don’t think this was Amazon’s primary intent. I’m not sure I know anyone who’s never made a purchase from Amazon. But because you don’t buy Amazon, you buy something Amazon sells, it doesn’t matter all that much whether you’re a new customer or an existing one. For a restaurant, however, it does. Existing clientele can take advantage of a Groupon discount just like new customers can. The next time they consider returning, they’re going to have an anchor set at that lower price. Our brains are hardwired not with gains but with losses. This is called loss aversion, and the mental trick has been confirmed in numerous studies since the late 70s, when Daniel Kahneman and Amos Tversky first coined the term. In the example of our Groupon restaurant, this means most people will see the last meal not priced at a discount but the next meal priced at a premium. This is why many gas stations charge a “discounted” rate for paying with cash. They’re really implementing a surcharge for paying with a credit card. Because the price is anchored at the more expensive of the two, drivers see it as a discount. Amazon also knows that many of these cards will never be redeemed. A poll of Groupon buyers last September found that 22% of Groupons purchased were never used. I wonder if any of this group thinks Groupon gave them anything… The funny part is, this is really the only “free” money in the entire discussion. For every card that’s never used, Amazon pockets $5 for doing absolutely nothing. But Amazon’s plan doesn’t even stop there. I purchased one of the cards, so I have $10 to play with, $5 of it being “free.” On the surface, it seems that I should just buy a $10 item. So I add that to my cart and start the check-out. Oh yeah… now I’ll need another $15 to reach the minimum price to receive the Super Saver shipping discount. No biggie; there are lots of things I need that I could buy from Amazon. Next thing I know, my cart totals $37. Again, I don’t believe Amazon was after new customers. What they were after is purchases that you likely would have made elsewhere. And just maybe you’ll remember how convenient it is to order online and have things magically appear at your doorstep. This reminds me… I have $10 to spend.