Can Consumer Discounts Actually Make You More Profitable?
It may seem counter-intuitive, but it’s true: Discounting your products and services can actually help you close more sales and generate more revenue. Discounts are good for your bottom line, but only when they are presented properly—aligned with human psychology.
But how does the human brain perceive discounts, and how can you present discounts in a way that makes them as appealing as possible? That’s what we’ll focus on in this post.
What Psychology Tells Us About Discounts
Let’s start with some basics. Everybody loves a good deal, no matter how large or how small it may be. Everyone likes to feel like they’re winning in their purchases, finding the best ways to save a few bucks off their purchase. The appeal of discounts is universal.
Any time you incorporate discounts or coupons into your marketing strategy, then, you’re on the right track. You’re making your products that much more enticing to your shoppers. The question is, how can you take your discount strategy to the next level, and gain the upper hand over the competition?
This brings us to the second basic point of human psychology. If the first is that all consumers like deals, the second is that shoppers don’t enjoy doing math. Very few shoppers actually take the time to run calculations, crunch numbers, and determine which deal makes the most sense for their bottom line. Rather, they latch on to particular figures and draw conclusions based on those numbers.
Consider the following deals:
- A thousand-dollar stereo system with a $200-off coupon
- A $50 shirt, marked down to $35
- A pair of $60 jeans, with an offer to buy one and get the second pair for 50 percent off
Now, if you actually crunch the numbers, you’ll find that the second deal here is technically the best—but again, most consumers won’t actually go to that trouble. Most consumers are likely to latch onto that 50 percent off figure in deal #3. They feel like this is a better deal, even though it’s not; it’s actually just 25 percent off the total purchase.
The bottom line: Don’t assume that consumers will always act in their own financial self-interest. In an effort to avoid doing real math, most shoppers will go with the deal that feels best, whether it actually is or it isn’t.
Different Types of Discounts
Before we get any further into discount strategy, it’s important to review some of the basic types of discounts that exist. Some of the most common variants include:
- Basic discounts—something like $35 off a purchase, or 10 percent off.
- BOGO—buy one, get one. This may mean getting the second product for free or getting it at a discount.
- Quantity discounts—something like buy four items, get the fifth for free. Or, if you spend more than $100, you get 10 percent off your purchase.
- Rebates—an amount of money is returned or refunded after the purchase is made. Usually, rebates are offered for more expensive, big-ticket items. Even rebates on lower-priced items can work.
- Free shipping, particularly on certain items or on orders that exceed a certain dollar amount. This is an increasingly popular option, especially in e-commerce and online retail.
Discounts and Consumer Behavior
With that foundation laid, we can move into some of the specific ways in which discounts impact purchasing decisions. Beyond the obvious appeal of saving money, discounts influence the way in which consumers interact with your brand in several other areas.
- Discounts create trust. When brands offer discounts, it causes shoppers to trust that brand more; they assume the discount is legitimate, even when it’s not. (For example, a store might bump its prices up by 10 percent, then offer a 10 percent discount, creating the illusion of saved money—but most consumers don’t really entertain this possibility.) Consumers generally assume the discount is a valid one, and this makes them more excited to buy the product in question.
- Discounts also create a sense of urgency. Even if you don’t specify the timeframe in which you’re running your deal or promotion, consumers just assume that the discount will expire in due time—meaning they’re not as likely to shop around or compare other products. They want to make sure they get that deal now, while they can.
- On the flipside, discounts also condition consumers to expect Thus, if a discount isn’t offered, the consumer may be more likely to search for discounts from a competitor’s brand, instead.
Obviously, then, discounts have their pluses and their minuses—but how can you determine which discounts make the most sense for your brand?
Choosing the Discounts that are Right for You
The goal, of course, is to identify the discount and coupon types that drive sales and increase customer participation—and the best way to go about this is to test multiple variations of a discount to discover which one has the most consumer resonance.
A simple example: Segment your email subscriber list, and send half of them a percentage discount, and the other half a dollar amount off the same product. See which deal gets the best results.
Also remember that the way in which you distribute your coupons and promote your discounts matters; in addition to testing different offers, try different communication channels.
Finally, remember that discount programs can eat into your profit margins. Before launching any sort of a coupon or discount campaign, run the numbers and make sure it’s not going to lead to financial losses.
Work with Hard Data from Incentive Insights
A final tip: As you consider the best incentive strategies for your business, it pays to back your decisions with real data. That’s what Incentive Insights can offer. Before launching your next big discount promotion, reach out to our team, and learn how we can help you take a truly well-informed approach to driving sales and strengthening consumer relationships.