Cashback shopping: How rewarding customers draws additional sales

Cashback shopping is a growing trend in ecommerce – it's becoming a popular alternative to conventional pricing.

This article is based on research by Marco BertiniPrasad Vana & Anja Lambrecht

Cashback websites reward customers when they shop online by returning them a percentage of what they spend when they purchase goods and services.

Shopping while earning money sounds like a win-win deal for customers. But what about companies? Cashback shopping is a relatively young and popular form of promotion that is seeing millions of consumers across the world buying from thousands of retailers resulting in billions of dollars of revenue.

Marco Bertini, Associate Professor at Esade, and his co-authors Prasad Vana (Tuck School of Business) and Anja Lambrecht (London Business School) reveal why rewarding customers is good for business and can draw additional sales.

The researchers analysed more than 3.4 million transactions by consumers at cashback shopping stores. On average, a consumer made a total of 45 purchases on 36 days, each worth 305 dollars, and received a cashback payment on 12 days, each worth 51 dollars.

These research findings in the Journal of Marketing Research demonstrate two interesting consumer behaviours:

  1. Cashback payments draw additional purchases
    Cashback payments increase the likelihood that consumers will make an additional purchase via the cashback company's website.
  2. Cashback payments increase the size of future purchases
    Consumers receiving cashback payments are not only more likely to buy again from the same company, but once they do, they increase the size of their future purchase.

"The finding that consumers are susceptible to the promise of savings is surprising because consumers are free to spend the money in any way they see fit, and yet they choose to spend it by purchasing again from the same company," say the authors.

Cashback shopping: a growing multimillion-dollar trend
The leading cashback company in the United States, Ebates, has processed cashback payments of over 800 million dollars to more than 10 million consumers since it began operating in 1998.
In the United Kingdom, Quidco processed more than 64 million dollars of cashback payments to its seven million registered users in 2016 alone and facilitated sales of close to 1 billion dollars for 4,300 retailers.

3 purchasing behaviour explanations

The authors outline three possible explanations that lead consumers to adopting this purchasing behaviour.

1.    Windfall money

The data suggest a possible explanation for this behaviour: consumers perceive cashback payments as windfalls. This pennies-from-heaven perception would explain why consumers are more likely to spend cashback payments via the cashback company.

Consumers perceive cashback payments as windfalls

2. Scheduling device

A second explanation is that consumers use cashback payments to schedule future purchases. One motivation for this can be financial: consumers with liquidity problems postpone spending until they receive cashback payments and have more money at hand.

Cashback ecommerce
Photo: Daria Nepriakhina/Unsplash

3. Transient state

The authors also suggest that cashback payments might trigger a transient state in consumers: "It is possible that cashback payments elevate one's mood, or that consumers perceive them as acts of kindness and reciprocate by spending through the cashback company. Cashback payments may have a temporary effect in customers that increases their propensity to purchase and spend."

Out of the three potential explanations, the authors propose that the most likely one is the first one because the bigger the cashback payment, the lower the effects. "People spend windfalls to the extent that they appear small, meaningless changes in one's wealth. As windfalls grow, they are more likely to be seen instead as assets, and therefore, more likely to be saved."

Generalist stores: the preferred choice

Another research insight reveals that cashback payments impact purchasing behaviour differently depending on the type of retailer.

"Once consumers get rewarded for their purchases, they are more likely to spend the money returned to them at generalist sites such as department stores and less likely to do so in categories such as travel and subscription-based services."

Cashback companies appear largely unaware of the effects of cashback payments. The analysis also proposes that cashback companies can increase their revenue by designing promotions that not only attract an initial purchase but also stimulate future purchases.

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