Is it better to offer your customers discounts or bonuses?

Sometimes it is appropriate to entice customers with a little something extra: either in the form of a discount (so they pay less), or a bonus (so they get more).

But which is better?

The economic argument is that it shouldn’t matter. Let’s say the standard price is $100 for 10 widgets. We could either offer our customer 10%, or $10 off, so they pay $90, which is $9/unit. Or, we could offer a bonus where they pay $100, but get 11 units of value rather than 10. This too equals $9/unit.

So on paper, there’s little difference. But from a behavioural science mindset, which offer is actually going to benefit our business best, and appeal most to our customers?

Pros and cons of discounts

Discounts are straightforward for the customer to understand.

“I would have paid $200 for this jacket, but because I’m special (or clever or lucky), I’ll only pay $150.”

They feel like they’ve won — like they’ve made money!

Discounts also work well if a third party is selling on your behalf, like offering your course to their clients because it makes them look like they have negotiated something special with you.

But because discounts are so easy to understand, they have a couple of disadvantages.

Discounts can:

• Be underwhelming. A bookseller offered $8 off my next order which seems measly. In this case they would have been better to use the “rule of 100”, which suggests we use a percentage rather than dollar value when goods are less than $100. For example, 15% off a $30 book seems more impressive even though it’s a smaller discount; and
• Undermine perceived product quality. Your price is a signal of quality, and discounts can erode this. Imagine buying a house that was $950,000 but is now only $860,000. You’d wonder what was wrong with it, wouldn’t you? This mindset is the same if you discount your products without a clear reason as to why.

How to get discounts right

1. Explain why they get the discount so it doesn’t erode perceived quality. For example, you get this discount because you are a member of X; it’s for a limited time only; you are one of the first 50 to buy; it’s an introductory offer; and so forth.

2. Don’t habituate customers to buy on sale. Retailers often fall into the discount cycle, from which it is difficult to escape. If your discounts are too frequent and regular, your customer will wait. If you do have to run cyclical offers (like year-end or Black Friday deals), limit their scope to a small set of products.

3. Vary what’s discounted. Supermarkets are clever in the way they promote particular items on sale to attract customers. Once there, shoppers invariably purchase non-promotional items that make up for what’s discounted.

4. Top up discounts will seem larger.

   Thanks to our tendency to make fast judgments, people tend to miscalculate discounts when they are expressed in chunks. For example, “30% off plus an extra 20% off” will be misconstrued as 50% off (e.g. $100 becomes $50). However, in actual fact, they get 30% off RRP ($100 down to $70) and a further 20% off the discounted price (20% off $70 saves them $14 and brings it down to $56).

Pros and cons of bonuses

Bonuses are a little more complicated for customers, and for that reason, can be useful. They appeal most when the quantity of something is valued — your customer will perceive “more” as a good deal.

For example, you might offer a free bonus month of subscription when people sign up, or a bonus nights accommodation when you book for a week.

The advantage is you get people to pay full price — you’re not altering the price they recognise they’re paying — so we avoid any degradation of the price point itself. Sure, customers could do the mental gymnastics of calculating the unit cost, but that’s not what will be etched in their mind. This makes it easier to handle renewals and avoids price sensitivity in people where they’ve seen your product at a lower price and want that.

Bonuses also mean you can provide something that has high perceived value but doesn’t eat into your margins. Offering an additional month of online access, for example, doesn’t cost you anything.

The challenge with bonuses is that they aren’t as clear-cut as a pricing discount. Your customer needs to see value in whatever the bonus is, and in some cases use it to justify it to themselves or others. (“Honey I saved $1000” is much easier to say than “Honey I got us an extra month’s membership”).

Another challenge is working out what bonus item will appeal to your customer.

How to get bonuses right

1. Look for something with sufficient perceived value, but low cost to you. It’s not why they buy, but it makes them feel good for doing it now.

   Offering a bonus of 33% more shampoo may only cost you 15% more to produce, for example.

2. It’s something to talk about. Like discounts, the fact that you offer a bonus gives you another chance to talk to your audience about your product.

3. Quantum of the bonus. The main product should carry the load here — the bonus is a nice little something on the side. It’s difficult to put a number on the ideal proportionality of bonus to the main product, but imagine it’s something like 5-10%. In other words, your bonus shouldn’t be more than 5-10% of the price/value of the main product.

   If it is more than this, it becomes a bundle — rather than a bonus.

4. Talk it up.

   Describe it as being “exclusive” so they feel special; use the word “free” because we all love getting free stuff; and include the associated value if it’s impressive (valued at $250, for example). Valued at $5 when you’re selling anything over $10 will not go down well!