Psychology of Discounts: Free, Percent, Dollars Off, Rewards

I’m not a coupon or discount shopper. It’s not that I don’t want to save money when I shop; the time and effort it takes to plan my shopping around an offer I received via email or direct mail isn’t worthwhile. That’s not to say I don’t take advantage of rewards and offers, though I do when they’re convenient. If I’m going to buy an item, I’m going to buy it. If it’s on sale or I can redeem some reward points, in all honesty, the brand probably just lost some profit on me.

On the contrary, I have good friends who save hundreds of dollars by planning their shopping around sales, discounts, and rewards. They don’t have brand or store allegiance, they just look for sales, clip coupons, and then shop with credit cards with loyalty programs. Likewise, the brand is probably losing profit on them, too.

I’m certain that we’re both extremes when it comes to this and that the center of the bell curve is people who can be motivated by discounts and will either spend more or return more to the store or brand to make the discount worthwhile in the long run. We’ve executed AI predictions at my company for retailers to avoid losing money on discounts and target customers who have a propensity to become loyal customers. The combination has helped to both increase loyal acquisition while reducing the drain of discounting.

Psychology of Discounts

Years ago, I shared this email I received from a large brand. I joked that the brand may not have understood math because two of the three incentives were equal in value… and the free offer was incredibly inexpensive.

The truth is that I didn’t understand the psychology behind discounting.

Not all offers are equally effective in motivating different types of consumers. This article explores how three different choices of discounts or rewards can lead to varying levels of consumer motivation despite equating to a similar cost to a company. We will also discuss the importance of simplifying offerings and providing different options to reach a wider audience.

The Role of Discount Framing

Research has shown that framing an offer can significantly influence consumer perception and motivation. A study by Kahneman and Tversky demonstrates that people are likelier to take risks to avoid losses than to achieve gains. This concept, known as loss aversion, can be applied to discounts and rewards.

For example, an offer framed as 20% off one item when I spend $20 or more may appeal more to consumers than $10 when I spend $50 or more. This is because the former offer is perceived as a potential loss if not taken advantage of, while the latter is seen as a gain.

The Allure of Free

The word free has a powerful psychological effect on consumers. A study by Shampanier, Mazar, and Ariely found that people are more likely to choose a free item over a discounted one, even when the discounted item has a higher value.

In the context of the example above, A free 12oz hot beverage may be more attractive to some consumers than the other two offers, despite potentially having a lower monetary value. Getting something for free can be a strong motivator, especially for those who frequently purchase hot beverages.

Since the coffee shop requires a trip through the store, the consumer is likely to pass through and see something else of interest and buy it.

The Role of Perceived Value

Consumers are more likely to be motivated by offers that they perceive as valuable. The perceived value of a discount or reward can vary depending on individual preferences and needs.

For instance, a consumer who rarely buys hot beverages may find the 20% off one item when I spend $20 or more offer more valuable, as it allows them to save money on a product they were already planning to purchase. On the other hand, loyal customers who frequently buy hot beverages may prefer the $10 when I spend $50 or more offer, as it rewards their continued patronage.

Tips for Simplifying Offerings and Reaching More People

So, the email offers I received above were quite intelligent in their choices. And the placement of the free offer between them, if on purpose, was quite brilliant. As a brand, you don’t always have to make a single offer focusing on your target audience segment. Here are some tips on developing discounts and rewards:

  • Conduct market research to understand your target audience’s preferences and needs.
  • Offer a mix of discounts and rewards that cater to different consumer segments.
  • Use clear and concise language when communicating offers to avoid confusion.
  • Experiment with different offer frames and monitor their effectiveness.
  • Personalize offers based on individual customer behavior and purchase history.
  • Regularly review and update your offers to keep them relevant and engaging.

Understanding the psychology behind discounts and rewards is crucial for companies looking to motivate their customers effectively. By considering factors such as framing, the allure of free, and perceived value, businesses can create offers that resonate with different types of consumers. Simplifying offerings and providing a variety of options can help companies reach a wider audience and foster long-term customer loyalty.

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Originally Published on Martech Zone: The Psychology of Discounts and Rewards: How Different Offers Motivate Consumers