Price promotion does not always work: online reviews, price-quality heuristics, and risk aversion

One-fifth of sales are made on price promotion. Price promotion is like winning a bonus reward. Despite the potential negative effect of price promotion on perceived quality, previous research predominantly indicates a positive effect of price promotion on sales. However, our analysis indicates that price promotion can hurt sales under certain circumstances. We examine more than ten million transactions on an online travel booking agency. The effect of price promotion on sales largely depends on online review valence and decision context. The positive effect of price promotion is attenuated when online review valence signals poor quality and price promotion is normally not expected. Price promotion is only a risk signal of poor quality when it is incongruent with the decision context and online reviews signal poor quality. Price promotion is a preferred sales strategy particularly when customer feedback is unfavorable. Meanwhile, our analysis indicates that launching price promotion in such circumstances hurts sales. The findings of this study show that heuristics and word of mouth together can influence people to make irrational decisions.