The Fascinating Psychology Behind Discounts and Promotions
With the move to digital over the past decade, consumers are spending more and more time on their phones. This created a huge opportunity for brands to be closer to consumers. At the same time, the sheer number of new direct-to-consumer companies popping up all over the place, spending tons on customer acquisition raised the bar for keeping customers loyal and engaged long-term.
Figuring out a way to develop and maintain relationships with the consumer is challenging on many levels, including data collection, software integration, communication, and calculating promo budget. That’s why introducing or reintroducing sales promotions can get expensive very fast and end up not creating value for a company.
Are you looking for inspirations for your next sales promotion? Check our our promotions inspirations library!
Designing any promotion should start with creating value for the consumer and for you. It boils down to leveraging the gaps between a consumer’s perceived value of something and your cost to provide it. These promotion psychology insights might help you identify these gaps and create offers that consumers value but cost you very little.
To learn more about particular marketing psychology phenomenons, please check out the dedicated posts below:
- The Psychology of Free Shipping.
- The Endowment Effect – Why Ownership Increases Product Value?
- The Decoy Effect – How to Compare Products?
- The Licensing Effect – Why Does the Sense of Doing Good Make Customers Spend More?
- Using the Psychology of Demographics.
- The Introduction to Reference Pricing.
- The Foot in The Door Technique.
- Primacy and Recency Effects for Ordering Items.
- How to Apply the Shopping Momentum in Your Sales Strategy?
- The Psychology Behind Ego Depletion.
- The Blemishing Effect – How Negative Information Can Impact Decision-Making?
- Mental Accounting – How to Juggle Customers’ Mental Budgets?
- Valuation and Devaluation Effects for Sales.
Read the Complete Guide to the Psychology Behind Promotions
Below, you will find a short summary of the key points to remember if you want to apply these psychological tricks into your promotional strategy. If you are interested in learning about all of them, make sure to download our ebook!
To warm you up before diving deep into the specifics, let's see a quick list of DOs and DON'Ts of promotion marketing (especially coupon discounts):
- The rule of 100
Most customers do not calculate the actual value of the discount – instead, they go for their gut feeling. It has been a standard practice in discount marketing to offer percentage discounts for prices under 100, and absolute discounts for prices over 100.
- Explain why
Offering products at a discounted price for no obvious reason may evoke suspicion among customers. Is the product broken? Is the expiry date coming soon? To avoid fishiness, state clearly why you are offering a discount – maybe you opened a new store or there is a holiday closing in? I am sure you’ll figure something out.
- Show the previous price
The most direct way to influence perceptions of a transaction is through a careful use of reference prices. Whenever a product is discounted, make sure customers can see what the price was before it was slashed. Don’t just tell them “It’s X% off!”
- Luxury doesn’t like discounts
If your brand strives for the top quality and exclusivity, steer away from discounting. Discounts force your consumers to pay more attention to the price and not to the product which may lead to a less luxurious image of your brand. You will likely be better off with VIP-only offers or an invitation-based loyalty program.
- Use rounded numbers
Studies have shown that customers perceive the difference between 4.97 – 3.96 to be smaller than the difference between 5.00 – 4.00. Use rounded values to make your discount stand out.
- Contextual messaging
Wording your offers in a contextual way affects how they are perceived. For example, “Get $X off” puts the focus on what the customer can gain, whereas “Save $X” puts the focus on the loss the customer can avoid. A/B test different approaches to see which method resonates better with your audience.
- Take advantage of FOMO
If you haven't heard of FOMO – it's the fear of missing out. The idea behind this piece of customer psychology is pretty clear – people don't like to miss out on great things, be it a memorable experience or a generous sale. You can amplify FOMO by launching time-limited flash sales or running product promotions on low-stock or limited-inventory products.
How the psychology behind free shipping affects customer behaviour?
In 2004, professor David Bell showed in his study that the cost of delivery and additional handling costs that appear in the first step of finalizing the order cause as much as 52% of cart abandonment.
For modern retailers and DTC brands, free delivery is standard for orders exceeding the agreed order. Of course, the delivery is not completely "free," and its cost is usually included in the product price of the product, or in the case of larger orders it is simply treated as a discount to the order.
What about the psychology behind this discount type?
Customers love the word FREE even more than you expect. The more you can claim something is a freebie, the more motivated your customers will be to get it. Free delivery is an additional incentive for customers who are more likely to buy something else just to exceed the order threshold to attain it. Then, customers feel that instead of paying for the shipment, they will pay as much when buying another product and therefore save money in the process. The price threshold for free shipping not only protects your store from overcharging shipping costs, but is also a way of motivating customers to buy more products through bundling.
The endowment effect
As customers value things more when they feel they own them, you can offer them a sense of ownership over coupons and sales promotions to increase engagement, and consequently sales. How to do that? The research suggests that one way to give customers a sense of ownership over promotions is to offer them a coupon that behaves or feels more like a savings card or a digital wallet.
Gift cards do the trick, too, as they feel more permanent than a random coupon code. The way you phrase your promotions also matters. To double down on this promotion psychology trick try to use phrases like “Here’s your 25$” or “We’ve added 10$ to your card.”
The power of product comparisons
Another interesting promotion psychology example is the Decoy Effect. This effect occurs when customers opt for the third option (the decoy) when faced with two other choices. For example, if you have an expensive product A with all features and a product C that’s cheaper but missing in functionality, the purchase of the product B which is reasonably priced and offers essential functionality would be considered a bargain.
The Decoy Effect highlights the fact that you need to be aware of what product options you put in front of your customers (and how you do it). That means you need to consider how customers will make trade-offs between products, and whether you may already have items acting as decoys.
Why does the sense of doing good make customers spend more?
The Licensing Effect occurs when people are more likely to act in a morally bad way after doing something morally good. Why does this happen? The performance of the morally positive act boosts our positive self-concept, which later on licenses the choice of a more self-indulgent and option.
This psychological effect can be successfully incorporated into your sales strategy by highlighting the good customers bring by purchasing your products or services. You simply need to give your customers a reason to feel moral (or morally superior) by shopping with you. Brands that have some form of social conscientiousness built into them should be sure to prominently display this fact: “By shopping with us, you are doing X good thing!”
The psychology of demographic affinity
Most businesses fail to utilize the full power behind incorporating demographic information into their marketing strategy. In most cases, the usage of demographic data revolves around which ads to show which customer group. However, this data can be leveraged to do so much more. Customers wanting to form a coherent identity and searching for the sense of affinity will be more likely persuaded by identity marketing.
Demographic data allows you to construct similar appeals – “4 out of 5 men prefer X” or “2 out of 3 San Franciscans like Y” will be much more persuasive than simply targeting men from San Francisco with ads for X and Y. Instead of targeting demographic, you should focus your marketing efforts on targeting identities.
Sales promotions and discounts are a key ingredient to boosting customer engagement and loyalty with your brand. Why? The answer is surprisingly simple – people love to get good deals, or at least, the feeling that comes with getting a deal. The Reference Pricing Effect is all about building this positive feeling that comes with finding a bargain.
One of the most direct ways to influence customer perception of what deal they are actually getting is by using reference prices. This trick is simple – instead of presenting only the price that customers have to pay, make sure to include another product price that makes the first choice look like a good deal. This is why it is important to highlight the previous price during sale.
The foot in the door technique
The next noteworthy discount psychology example is the foot in the door effect which occurs when customers have done something small for you, which leads them to be more willing to do something bigger later on.
This psychological trick is a well-known and widely used tactic in everything from auto sales to telemarketing. However, using it in an online context poses some unique challenges. There are a lot of factors that can drive the foot-in-the-door effect depending on the context, but at its core lies the commitment and consistency. When it is time to make the second decision (e.g. to purchase something online), the fact that your customer has already committed (even in a costless way) to the first action leads them to feel a need to be consistent with that commitment.
How can you use this effect in sales promotions? For example, as a cosmetics brand, you can hand out free product samples to customers outside your stores. After accepting these free samples, customers will be more likely to enter your store to buy other products. In the digital sphere, however, the most popular way of putting this effect into practice are signup forms and offers. For example, ride sharing apps give free minutes for new customers. Many customers would never try the product/service without this initial incentive.
Because the past behavior is such a strong first step for a foot-in-the-door effect, anything that draws customers’ attention to relevant past actions has the potential to open the metaphorical door. One of the most obvious implications for your marketing strategy is that reminding returning customers of their previous purchases can be very powerful. This is how Zalando uses this piece of customer psychology in practice:
The psychology of shopping momentum
Have you noticed that regular customers tend to spend more than new ones? I think you have. The shopping effect describes a phenomenon when consumers who choose to make a purchase are subsequently much more likely to make another, unrelated purchase. In one experiment, participants first chose whether or not to buy a light bulb, and then chose whether or not to buy a keychain. If they did not buy the light bulb, there was a 31% chance that they would choose to buy the keychain, but if they did buy the light bulb, then the likelihood of them buying the keychain more than doubled to 67%!
How to apply the psychology of shopping momentum in your promotional startegy?
Well, it can be applied to at two different levels. The first strategy is to apply the shopping momentum as simply the effect of buying something. Deals, promotions, or strongly tempting loss-leaders can serve as ways to get customers to buy something, which in turn will make them more likely to buy something else.
The second strategy is to play with the underlying cause of the shopping momentum – the implementation mindset. One way might be to highlight the steps needed to purchase a product in the space where customers might normally expect to see product information. By putting this implementation information front-and-center, your customers will be more likely to start thinking in these terms. Any wording that encourages your customers to think about how they can buy your product rather than should they buy will make them more inclined to do so.
This is how Amazon achieves this effect with their 1-click purchase option.
The best promotional strategies aren't about mindlessly slashing prices. Sales promotions and discounts are about how customers perceive prices, brands, products, and what they expect from you specifically. By combining sales promotions psychology with attractive incentives, you are setting up yourself for success. If you don't, they you might be losing a sizeable chunk of revenue. FOMO, anyone?
Start using science-backed discounts in your strategy today