Pretty interesting article in the current edition of the Economist about the psychology of discounting:
A team of researchers, led by Akshay Rao of the University of Minnesota’s Carlson School of Management, looked at consumers’ attitudes to discounting. Shoppers, they found, much prefer getting something extra free to getting something cheaper. The main reason is that most people are useless at fractions.
Consumers often struggle to realise, for example, that a 50% increase in quantity is the same as a 33% discount in price. They overwhelmingly assume the former is better value. In an experiment, the researchers sold 73% more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount (even after all other effects, such as a desire to stockpile, were controlled for).
This numerical blind spot remains even when the deal clearly favours the discounted product. In another experiment, this time on his undergraduates, Mr Rao offered two deals on loose coffee beans: 33% extra free or 33% off the price. The discount is by far the better proposition, but the supposedly clever students viewed them as equivalent.
73% higher sales is an astonishing number that comes simply from positioning the same discount differently. Of course, this only helps if you are making a positive contribution margin on the sales!
This reminds me a bit of Prize-Linked Savings accounts, basically savings accounts with a lottery ticket attached (that is bought by slightly lowering interest rates):
One way to think of these “prize-linked” accounts is that they can offer an expected market return, but in an innovative way. They pay a guaranteed return below market interest rates, but also provide a lottery ticket whose value makes up the difference.
To be specific, a lottery-lined savings account could offer a lower rate of interest, but also say a one-in-a-million chance of winning $1m for each $100 deposited. Mathematically, the expected return is the same, but the chance to win $1m makes the account much more attractive.
Britain has historically led the way with these sorts of savings opportunities, starting with the “million adventure” lottery in 1694. Households were offered 100,000 tickets at £10 each, with poorer groups able to club together to buy fractions of tickets. Holders received a 6 per cent annual return for 15 years, plus the opportunity to win a prize of between £10 and £1,000. Historians suggest the programme was popular and successful. More recently, much the same theory was seen in the UK’s Premium Savings Bonds, which offer the opportunity to win a prize but no base interest rate. From Brazil to Germany, Mexico to New Zealand, a variety of other prize-linked savings opportunities already exists.
This is another example where reframing the same economic returns can change user behavior. I wonder if framing a 33% off sale so that people buy at full price but with “Every third purchase free” might increase sales overall. Has anyon had any experience with this?
UPDATE: Recently found a really fun and relevant post on pricing experiments that is worth reading from conversionXL.