Discount Psychology


Who doesn’t like a sale?  I know I do!  But did you know that not all sales are created equal (even when they are)?  When it comes to sales, it turns out it’s more about perception than reality.

Last week, the Economist featured an interesting article which recounted the results of a University of Minnesota study on discounting.  And because game-show-esque examples are more fun than regurgitating conclusions from a journal, it’s time to play:

Hmm.  This is a tough one.  Did you pick A?  Most of the study participants did.

Unfortunately you have been misled, dear reader.  The answer is…..

Both are equivalent deals.

This has interesting implications for retailers.  If you are going to put a product on sale, science has clearly demonstrated that customers strongly prefer getting more of something for free, rather than saving money on a single item.  In the study, the researchers sold 73% more of their product using the “more free” strategy.

Don’t fret if you got it wrong because you have a chance to redeem yourself in round 2.  It’s once again time to play:

Hmmm…hmmmm….

So what do you think this time?  Are these deals the same?  Most of the study’s participants thought so.  (They both reference 33% after all…)

Nope.  In this case, B is by far the better deal.

In the first example, we saw that customers prefer getting more of something rather than saving money on a single item.  In this case, we see the same behaviour again, even when they would have saved a lot more money by choosing B.

As a retailer, you would actually stand to make more profit by offering a bit more of something for free, rather than offering a steep discount.  Customers generally view the deals the same, so you might as well offer the one that is more profitable for you.

Okay, time for round three.  You’ve got one last shot to redeem yourself.  It’s time to play:

Now this is something I see all the time when I’m shopping.  A previously discounted item has an additional discount applied to it.

What’s the better deal?  The study’s participants thought A was…

And if you did too…you’d be 0/3.

Yes, they are equivalent deals!

As a retailer, this is good to know.  Multiple discounts applied to the same product seem like better value, even though the cost to you is the same as one larger discount.

So why is this the case?  Are we all that bad at math?

Basically…yes.  And when reason goes out the window, it seems we rely on other less-reliable clues (i.e. more is always better).

Knowing these tricks could make the difference between a successful sale, and a not-so-successful one.  It also offers a sneaky opportunity to compete with other retailers.  Is your competitor discounting their widgets this weekend?  Offer the same deal, but instead offer an equivalent amount of free bonus products and you’ll be stealing their customers in no time.

So remember, when you’re planning a sale, customers always want to feel like they got “more” for their money, even if they really got less.  But don’t worry; they’ll thank you for it.

 

Have you used any of these pricing strategies?  What has worked in your store?

——

Thanks for reading!  For information on cellular point of sale, visit our website: mmspos.com

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Posted on July 10, 2012, in 'We Get Retail' Business Tips, Consumer Psychology Files and tagged , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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