The psychology of discounts
Discounts are something everybody uses, especially when you want people to buy a certain product. We’ve just had Black Friday and Cyber Monday, Christmas is coming. Discounts are everywhere, and you have probably noticed there are a lot of different ways to give that discount. In this article, we’ll go into the psychology of discounts and what kind of discounts work best for most people. But let me start by explaining why discounts work in the first place.
Why do discounts work?
Most discounts work on the principle of urgency, as the discounts are only available for a specific period of time. If people don’t buy the product now, at the discounted price, they’re likely to miss out on saving some money. There is urgency involved. That anticipation of missing out is exactly why discounts work.
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As I’ve said, there are a lot of ways of giving your customers a discount. You can give them free products if they buy certain (amounts) of items, free shipping, a fixed price off, a percentage off, etc. You can even give your customers a discount on top of another discount.
But some of these discounts actually do work better than others. For instance, people prefer to get 50% more of the same product for the same price than save 33% on the price, even though that comes down to exactly the same thing. Also, people like it better when you give them a 25% discount on top of a 20% discount, instead of a single 40% discount. And yes, again, this comes down to the exact same discount.
On top of that, discounts are regarded as relative. What I mean by this, is that a $10 discount off a $100 product will be regarded as much less than a $10 off a $20 product. The absolute discount is exactly the same, but the relative discount is much smaller in the first discount. So, if you give people a fixed $10 discount, don’t count on selling a lot of $100+ products.
Wording has a lot of impact on how people perceive your discounts. For instance, “Get $ off” emphasizes achieving a gain, while “Save $” emphasizes avoiding a loss. You should test which kind of wording works best for your specific company. This basically depends on your customers; are they more likely to achieve a gain or more likely to avoid a loss? In general, though, it’s been found that a wording like “Get $ off” will motivate people to buy more, even if the other products are not actually on sale.
If we elaborate on that, you might actually consider dropping the dollar sign altogether. Karl Gilis of AGConsult explains this in his Dutch article: 6 Unexpected tips to sell more using pricing psychology. The dollar sign or euro sign actually reminds people of the pain of paying for something. Reducing the size of the sign, of simply removing it really seems to push sales. Note that this is a bit difficult though, when you’re selling your products in multiple currencies
A quick word on the ‘9′
Just adding a 9 at the end of your (discount) price isn’t always the best strategy. In the article mentioned in the previous paragraph, Karl explains that a price like 9.99 looks cheaper than 10. But that really goes for products that need to look cheaper, or simply are cheap. For luxury goods, the ‘cheap’ psychology of that price might backfire, as one of the unique buying reasons for a luxury product is quality and people are willing to pay for quality. A product that costs 399 looks ‘inferior’ to the similar product priced at 400. Just something to keep in mind.
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Duration of the discount
Unfortunately, I couldn’t find a lot of research or posts done on the duration of promotions or discounts. Personally, I’d not leave a sale or promotion period running longer than a couple of weeks. If the period lasts longer than that, you’re risking negating the urgency principle.
Think about how long you’d want the discount to last. And make sure you communicate this clearly to your potential customers. If you have an actual sales force it’s mentioned that a maximum of 6 weeks for a promotion is more than long enough. Apparently, employees can’t (or won’t) focus on a promotion after 6 weeks. However, I think 6 weeks is pretty long, especially for online shops. That probably covers a number of holidays (a.k.a. sales opportunities), right?
Pros and cons to discounts
After all this information, I feel compelled to give you some pros and cons to discounts. The con I have to discounts is pretty simply: don’t overuse discounts. Our good friend Chris Lema is actually completely against them, saying discounts just don’t work. While we reserve a somewhat more moderate opinion for ourselves, we do completely understand where he’s coming from.
There’s a risk to (back-to-back) discounts. The risk that people get used to not paying full price in your store. That’s why I’m telling you to be careful with discounts. Don’t give away discounts too regularly or too often. Especially if you’re offering a single service or just a few products (as we do), discounts could backfire on your overall sales. Think about why you should give a discount on which product. And when.
Obviously, discounts have a major benefit as well: discounts will attract new customers. Giving people a discount might just be the thing to draw them in and become your customer. And new customers mean new opportunities for cross-sells and upsells, meaning more revenue in the long run as well.
Discounts for existing customers
Discounts are not only a way to acquire new customers, they’re also a way to show your gratitude to your existing customers. What better way to show that gratitude to your most valuable customers than to give them a discount. Giving discounts can come in the form of sending your best clients a free product, a discount code or whatever else you can think of.
These discounts or gestures don’t actually have to be that big to make someone appreciate the effort. In fact, the customer won’t only appreciate it, the customer’s behavior will actually change as well! It’s as they say: it’s the thought that counts.
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