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The psychology of discounts

The psychology of discounts

Discounts are – especially in times of crisis – a popular measure to promote product sales. However, as is well known, discounts have the disadvantage that they reduce the margin and often damage the brand. Above all, however, discounts are less effective than alternative measures to increase sales, as a recent study published in the Journal of Marketing shows

A team of researchers led by Akshay Rao from the Carlson School of Management examined the effect of different types of discounts on our shopper preferences and our purchasing behavior. The study showed that shoppers have a clear preference to get more of a product at the regular price than to get it in the standard quantity at a discounted price. In a field experiment in a real supermarket, the researchers sold 73 percent more hand lotion with a bonus pack (at the regular price) than without a bonus pack but at a discounted price. The overwhelming majority of shoppers prefer the option of purchasing 50 percent more of a product than they would be offered at an – equivalent (!) – 33 percent lower price. This preference for the bonus pack even persisted when the price discount offer was objectively much better. Coffee beans were offered on the one hand with 33 percent more (free) beans, on the other hand at a price that was 33 percent lower. Although the discount is objectively the better offer, consumers viewed both offers as being equivalent.

The reason for this is: It is cognitively complex to make the objective better choice, since we have to do fraction calculations. In a shopping situation in particular, this overwhelms us and we do not realize that an increase in the quantity of the product by 50 percent (e.g. overfill) and a price discount of 33 percent are identical in value. We pay attention to the absolute level of the percentage and let it seduce us. We prefer the offer of getting 50 percent more of a product to an equivalent 33 percent discount because 50 percent is absolutely the larger number. If the percentage is the same, we consider the offers to be the same – even if this is objectively not the case.

It is more effective to give the customer advantages than to reduce costs or weaknesses

The implications for marketing are clear: More of the product at the same price should be the preferred type of promotion – as long as the additional costs for production, transport, shelf space and so on do not negate the advantage. In addition, the principle of offering the customer more value instead of lower costs does not only apply to promotions. For example, when it comes to promoting the efficiency of a new car, it is more convincing to advertise the additional kilometers per liter of gasoline rather than the equivalent percentage decrease in gasoline consumption. When it comes to promoting the speed of data transfer (e.g. USB drive, Internet), delivery service (e.g. package is delivered in two days), services (e.g. problem is fixed in 24 hours), it can be more effective to use the improvements in emphasis on speed (about 25 percent faster) rather than the equivalent decrease in time expenditure (e.g. 20 percent). All of these examples show the same principle: It is more effective to give the customer advantages than to reduce costs or weaknesses.

Discounts reduce the impact of products

In addition, the aforementioned study reminds us once again that a price communicates more than just the costs. In product categories in which there are large price differences – but only there – the price also serves as a quality feature. A discount can therefore reduce the expected or experienced quality. Even more: prices and discounts also change the actual product experience. Research in the field of marketing placebos shows that the same wine is judged differently depending on the price. If the price is high, the wine tastes better. Discounts have the opposite effect: They reduce the effect of products. Energy drinks, for example, increase blood pressure. However, this effect is significantly less when the energy drink is discounted.

About the author: Dr. Christian Scheier is one of the few neuropsychologists in the world who combines research and practical expertise in marketing consulting. After a scientific career at the renowned California Institute of Technology and the successful establishment of an agency for marketing research, he founded the decode Marketingberatung GmbH together with Dirk Held. He is the author of various publications and is also a sought-after speaker at home and abroad.

Read all of Christian Scheier’s columns.