The Human Psychology of Discounts: What Type of Discounts Work Best and Why?

In the fiercely competitive world of retail and e-commerce, businesses are constantly striving to capture the attention of potential customers and persuade them to hit the buy button. Discounts have long been a powerful tool in attracting and retaining customers, but choosing the right discount strategy is crucial for maximizing their impact on sales. So, how do you determine whether percentage-based or fixed-amount discounts are more effective for your target audience?

Key Takeaways:

1. According to the “anchoring phenomenon”, dollar-based discounts can be most effective if the customer hasn’t seen the price yet.
2. According to the “$100 rule”, percentage-based discounts work better on items under $100, and dollar-based discounts are more effective on items over $100.
3. In general, most people perceive percent discounts to be more valuable, especially if they’re for items under $100.

Human Psychology and Consumer Behavior

Below are four reasons to consider one type of discount over the other:

1. The Anchoring Phenomenon

The anchoring phenomenon is a cognitive bias where people excessively depend on the initial information they come across (ie. the “anchor”) when making decisions. In terms of discounts, the anchor is the original price. Percentage-based discounts emphasize the gap between the initial price and the discounted price, which makes customers more conscious of the savings they are receiving. In contrast, fixed-amount discounts present a specific savings sum, which might not have the same psychological impact if the initial price is not prominently shown to the customer.

2. The 100-Dollar Rule

According to this principle, percentage-based discounts usually work better for items priced under $100, whereas fixed-amount discounts are more effective for items over $100. This is because the human brain perceives the savings as larger when expressed as a percentage for less expensive items and as a fixed amount for more expensive items. For instance, a 20% discount on a $50 item appears more significant than a $10 discount, even though the actual savings are identical. On the other hand, a $200 discount on a $1,000 item seems more appealing than a 20% discount, despite the same savings.

3. Price Perception

Customers often view percentage-based discounts as more meaningful, even when fixed-amount discounts provide the same or greater savings. This can be attributed to the fact that calculating the actual savings from a percentage-based discount necessitates some mental effort, which may lead customers to overestimate the savings. Conversely, fixed-amount discounts offer the precise savings amount upfront, which has the potential to be perceived as less impressive.

4. Price Sensitivity

The success of percentage-based vs. fixed-amount discounts may also depend on the target audience’s price sensitivity. For cost-conscious customers, a percentage-based discount may be more enticing, as it creates the impression of a better bargain. A fixed-amount discount might be more effective for customers less focused on price and more concerned with quality or product features, as it communicates the savings directly without the need for any mental arithmetic.

Conclusion

In summary, both percentage-based and fixed-amount discounts can be effective. Still, their relative success hinges on factors such as the product’s price, the target audience’s cost sensitivity, and perceived savings. It is crucial to experiment with and evaluate the performance of various discount types to determine which is best suited for your particular products and customers.