The science behind sales, deals, discounts and promotions
Many times we have been asking ourselves, or have been asked by our clients, which discounts, deals and promotions work best, at a specific moment. Let’s take the bull by the horns and dive into the subject, looking at the science behind great sale decisions.
Let’s take a look at Hoon S. Choi, B. Dawn Medlin and Scott Hunsinger, who have been researching on the Software-as-a-Service (SaaS) Market, and who draw four conclusions in their paper, An Empirical Study on the Impact of Price Discounts on Sales in Software-as-a-Service, which are perfect as a starting point: 1) Price discounts have a positive impact on the sales increase. 2) Price discount rate has a positive impact on the sales increase. 3) The amount of discounted price has a positive impact on the sales. 4) The increase of competitors offering price discounts has a negative impact on the sales.
Like many other research studies, their findings prove first and foremost that sales work. And with the main goal of any offers being the creation of consumer interest and increase of demand, it’s great if existing customers buy more, or buy more often than they would have otherwise, but it’s amazing to draw new customers in. For that to happen, though, the deal offered must be compelling enough for them to take action, especially with all the other discounts present, in the same time, on the market, just like we’ve seen above.
Moving forward, let’s list a few tips and tricks that help a particular deal cut through the clutter, making it more actionable:
Discounts work better if the principle of urgency is applied, with discounts only being available for a specific period of time. Not buying the product at the discounted price makes people miss out on saving some money, hence the sense of urgency, with the anticipation of missing out being exactly why the discount works.
Researchers at Cornell University investigated which price display caused restaurant visitors to spend the most. Between the following three options, a) with the currency sign: € 20.00 b) written in full: twenty euros c) without the currency sign: 20.00 … the price without the currency sign had 8% more sales and the reason behind is that customers think less about the 'pain of paying', when seeing the price like that, focus less on what they spend and more on what they get.
It’s been also proven that people prefer to get 50% more of the same product for the same price, compared to saving 33% on the price, even though that comes down to exactly the same thing. Also, customers like it better when they get a 25% discount on top of another discount of 20%, instead of a single 40% discount.
Culture counts, as well. Taking into account the side where we start reading, the first digit of a number hangs the most. For example, customers see 9.99 euros as a much better deal than 10 euros, even though there is hardly any difference. This only works for the prices of cheap products, since customers make less effort to make decisions about such low prices, subconsciously, and do not even register the decimal digits. Prices ending with 95 or 99 are also considered bargains.
The anchor effect tells us that the first price proposed to customers has an effect on the following prices they see. If they will first see a price of 5000 euros and then one of 1500 euros, the 1500 euros product will seem as a bargain. If they first see a price of 100 euros, though, the 1500 euros product is suddenly very expensive.
Psychological pricing was also proved by Dan Ariely, when investigating the subscriptions of The Economist, in what was called the decoy effect. Customers were offered three choices: a) Online subscription: $ 59.00 b) Print subscription: $ 125.00 c) Combination of the two: $ 125.00 When all three options were offered, 16% would choose option a), while 84% the more expensive option c), which would look like a promotion. If only the first and third options were offered, without the decoy, 68% would choose option a) and only 32% option c).
Going back to research, Mariola Palazon and Elena Delgado‐Ballester write in they paper Effectiveness of price discounts and premium promotions that at high benefit levels, price discounts are more effective than premiums, while the opposite occurs at low levels.
Also known as the rule of 100, the research proves that under 100 percentage discounts seem larger than absolute ones, but over 100, things reverse and absolute discounts seem larger than percentage ones.
Here’s an example. For a T-shirt priced at 20 euros, a 25% discount would get better results than saying it’s reduced with 5 euros. For a 2000 euro laptop, on the other side, a 25% discount would get less sales than saying that it’s reduced with 500 euros. And you can see a second example at the end of this great video on how baboon research is explaining our spending habits.
In their paper The Discounting of Discounts and Promotion Thresholds, Sunil Gupta and Lee G. Cooper write that customers also then to discount the discounts, meaning that when seeing a discount they have a tendency to feel that the value of the product is decreasing. This is happening at a higher level for store brands compared to name brands, and more the higher the discount offered goes. They have also found that the promotion threshold, the moment the customer is ready to take action, lies after a discount of 5% to 15%, versus the saturation point, the moment where customers start considering the decrease in value, which comes for discounts higher than 20% to 30%.
Let’s wrap it up with Jung Eun Lee and Jessie H. Chen-Yu’s conclusion from their paper, Effects of price discount on consumers’ perceptions of savings, quality, and value for apparel products: mediating effect of price discount affect, where they find that even though “offering a high price discount can increase consumers’ perceptions of savings, it also has a negative effect on consumers’ perceptions of apparel quality. Apparel retailers need to keep in mind that price promotions are a double-edged sword: they create both positive and negative influences on consumers’ perceptions.”
Next, they also offer a great advice, that can be put into practice straight on: “The enjoyment that consumers experience from a price discount can increase their perception of value directly and also compensate for the negative effect of a price discount on perceived quality. Therefore, when developing pricing and promotion strategies for online apparel shopping, retailers should make efforts to create pleasant affective experiences rather than focus on only monetary savings. Instead of simply stating the percentage of the price discount, retailers can find peripheral ways to present the price discount to increase consumers’ pleasure. For instance, Naylor et al. (2006) found that the participants responded significantly faster when a promotion (e.g., a 10% discount) was associated with pleasant words (e.g., joy, delight) than with neutral words. Price discounts for special occasions, such as customers’ birthdays or wedding anniversaries, or limited-time price discounts (i.e., flash sales) may be effective ways to create positive affective responses when consumers shop for hedonic products such as apparel.”
If you are interested to see how the principles we listed and exemplified above are reaching customers, here’s a great infographic showing exactly how discounts affect consumer buying behaviour.