Reports

Cashback Is Cash Forward: Delaying a Discount to Increase Future Spending

Prasad Vana, Anja Lambrecht, and Marco Bertini, 2015, 15-112

Online cashback shopping is a relatively young but fast-growing phenomenon. Briefly, cashback companies advertise cashback offers—usually refunds equaling a percentage of money spent—on their websites on behalf of cooperating retailers. Registered users interested in a particular offer click through from the cashback company’s website to the retailer’s online store. For each referred purchase that takes place, the cashback company later receives a commission from the retailer and deposits the promised saving, or cashback payment, into the bank account indicated by the user.

Prasad Vana, Anja Lambrecht, and Marco Bertini study purchase behavior in this context. Specifically, they study the possibility that aside from the predictable positive impact of a cashback offer on initial demand, the cashback payment that follows a purchase with delay induces further spending. They find evidence of such a “repurchase effect” in panel data obtained from a large cashback company. In particular, they show that cashback payments increase not only the likelihood that a customer shops again through the cashback company’s website, but also the amount spent by that individual. They also demonstrate that, in line with theory, the effect is more pronounced for households with lower income than with higher income.

Marketing implications
The observation that cashback promotions stimulate demand at multiple points in time implies that managers need a broader perspective than is perhaps customary to assess the effectiveness of a campaign—either in absolute terms or relative to other activities intended to drive sales. According to the authors’ estimation, 9.6% of the money paid out in cashback payments is spent again through the cashback company, a figure accounting for up to 8.5% of the overall effectiveness of a cashback promotion. Yet, managers of cashback companies are currently not well aware of this effect.

Second, the decision to delay paying a discount is often motivated by the hope that people will not bother to claim the money, rather than an intention to price-discriminate among individuals with different willingness to pay for a good. The authors suggest that when payments are automatically processed, as is the case for online cashback, a benefit of separating a discount payment from the purchase event may arise out of positive spillover effects on future purchases rather than from imperfect redemption behavior.

Prasad Vana is a Ph.D. candidate in marketing and Anja Lambrecht is Assistant Professor of Marketing, both at London Business School. Marco Bertini is Associate Professor of Marketing Management, ESADE, Spain.

Acknowledgments
The authors thank Bruce Hardie and Puneet Manchanda for helpful comments and suggestions at different stages of the project. 

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