What makes deal-of-the-day promotions really effective? The interplay of discount and time constraint with product type

Deal-of-the-day (DoD) promotions are nowadays very popular. As a special form of a price promotion, they allow firms to offer products at substantial price discounts, usually at or above 50%, for a very limited period of time, usually between one and seven days. Conventional wisdom suggests that both characteristics, high discount levels and tight time constraints, should make DoDs an effective form of a price promotion. However, the two characteristics do not necessarily combine to increase DoD effectiveness. In particular, the authors propose that depending on the type of a promoted product (utilitarian vs. hedonic), the attention that consumers pay to the discount level relative to the time constraint varies, which leads to differences in promotional effectiveness. Two studies, a lab experiment and a field study using data from the DoD platform Groupon, mostly confirm these hypotheses: the time constraint increases promotional effectiveness more for hedonic than for utilitarian products, whereas the discount level increases promotional effectiveness for utilitarian more than for hedonic products. In the Groupon data, very high discount levels actually decrease promotional effectiveness for hedonic products. The results suggest that designers of DoD promotions should consider the type of a promoted product when choosing appropriate time constraints and discount levels.