Leveraging the Psychology of Discounts to Make More Money

Quick: which of the following represents the biggest percentage discount?*

  1. $200 off a $999 TV
  2. A $35 pair of sunglasses, marked down from $50
  3. Buy one shirt for $60, get the second for 50% off

If you selected B, congratulations—you’ve successfully maneuvered through some crafty discounts to find the best deal. If you picked another answer, don’t worry, most of your customers are doing the same thing. In fact, clever marketers depend on this consumer behavior to increase sales.

How do you present discounts? To get started, take a page out of a consumer behavior book.

Understanding the Psychology of Discounts

First, it’s important to note that everyone is attracted to a deal, no matter how large or small. Just think—would you rather pay full price for an item when you could save a few bucks instead?

By incorporating coupons and discounts into your overall marketing and pricing strategies, you’re already appealing to the minds of shoppers. But to take things to the next level, it’s important to realize one common theme: shoppers don’t like to do math. Instead of crunching numbers, they’ll focus on particular figures in a discount promotion and draw their conclusions based on that amount.

Looking at option C in the example above, most consumers will focus on the 50% off figure, as opposed to doing a basic calculation to see that they’re really saving just 25% on the total purchase. Because of this, shoppers feel that they’re getting a better deal than they actually are.

The main takeaway is this: although the primary rule of economics states that consumers will act in the most rational, self-benefitting way, discounts have a big effect on purchase behavior.

An Introduction to Discount Types

Before you begin experimenting with your discount tactics, you should know more about the most common discount types, summarized below:

  • Dollar or Percentage Off: This discount type is the most standard and widely used, simply offering a reduction on the original price, such as $25 off or 20% off. These discounts can be placed on specific products or applied to an entire order.
  • BOGO: Short for “Buy One, Get One,” this discount type prompts customers to purchase additional items. Examples of BOGO include “Buy One, Get One Free” or “Buy One, Get 50% Off the Next Item.”
  • Quantity Discounts: Quantity discounts encourage shoppers to increase their order value to a specific threshold to receive a discount. For example, “Purchase 4 items and get the 5th free,” or, “Receive 15% off your $150 purchase,” are considered quantity discounts.
  • Rebates: A rebate is an amount that’s returned or refunded to customers after their initial purchase. Often used for large-ticket items, the most common form is a mail-in rebate. An example of this would be listing a price as “$349.99 after rebate.”
  • Free Shipping: Increasingly popular among online business owners, free shipping fully removes the shipping cost associated with any order from the customers. Many merchants offer free shipping for a certain order amount, such as “Free shipping when you spend $49.95.”
  • How Discounts Impact Consumer Behavior

    Beyond appealing to the notion of helping shoppers save money on an item, discounts also have an impact on how consumers interact with your products and brand.

    Discounts Assume Trust

    Consumers overwhelmingly trust that an offered discount is a legitimate reduction from the original price. In other words, you could technically raise the price of an item by 20%, then turn around and offer a 20% discount, but consumers very rarely consider this possibility. This assumed trust in your discount leads to a feeling of excitement towards your offer.

    Discounts Reduce the Propensity to Search

    Studies show that the offering of a coupon or discount can dissuade consumers from searching for other offers. This is because discounts create a sense of urgency to purchase, which distracts shoppers from looking for other options. This impact on consumer behavior is particularly important for online businesses, in which price comparison shopping is rampant thanks to the wide availability of competitors in the digital space.

    Discounts Create a Sense of Urgency

    Discounts entice shoppers to purchase sooner. This can be attributed to the idea of scarcity, in that consumers understand that there aren’t always discounts available to help save money. Urgency is a critical element in moving customers past the purchase threshold, and can be aided with your marketing communications—for example, including “One day only” or “Last chance!” messaging helps remove any purchase hesitations that may be holding customers back.

    Consumers Learn to Expect Discounts

    One downside to coupons and discounts is that they train consumers to expect them when making a purchase. This expectation often prevents shoppers from purchasing items at regular price, and encourages them to look for competitor discounts. In the realm of ecommerce, this expectation is becoming increasingly true with free shipping promotions. To help prevent customers from only purchasing with a discount, it’s recommended that you be strategic with the type and timing of your discount campaigns.

    Learning Which Discounts Work for You

    Since there are so many ways for you to position discounts with your customer base, it’s important to discover which are the most effective in driving sales and increasing redemption rates. To do so, we recommend testing multiple variations of a discount to see which are most impactful. For example, you can segment your email list and send one half a percentage discount, while and the other half receives a dollar-off discount. Based on the results, you’ll have a much firmer understanding of which discounts best appeal to your audience. You can try the same with different discounts and communication channels, too.

    Important: Don’t forget that discounts can easily eat into your profit margins, so always crunch the numbers internally before launching or testing any type of discount campaign.

    Once you have a better understanding of how discounts impact your specific audience, you’ll be in much better shape to mix up your campaigns to boost sales and customer engagement. All it takes is a little math and a bigger appreciation for the power that discounts have over your customers’ minds.