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 shouldnโt matter. Letโs 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, thereโs 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.
โI would have paid $200 for this jacket, but because Iโm special (or clever or lucky), Iโll only pay $150.โ
They feel like theyโve won โ like theyโve 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 โrule of 100โ, 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 itโs 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. Youโd wonder what was wrong with it, wouldnโt you? This mindset is the same if you discount your products without a clear reason as to why.
How to get discounts right
Explain why they get the discount so it doesnโt erode perceived quality. For example, you get this discount because you are a member of X; itโs for a limited time only; you are one of the first 50 to buy; itโs an introductory offer; and so forth.
Donโt 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.
Vary whatโs 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 whatโs discounted.
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, โ30% off plus an extra 20% offโ 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 โ your customer will perceive โmoreโ 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 โ youโre not altering the price they recognise theyโre paying โ so we avoid any degradation of the price point itself. Sure, customers could do the mental gymnastics of calculating the unit cost, but thatโs not what will be etched in their mind. This makes it easier to handle renewals and avoids price sensitivity in people where theyโve seen your product at a lower price and want that.
Bonuses also mean you can provide something that has high perceived value but doesnโt eat into your margins. Offering an additional month of online access, for example, doesnโt cost you anything.
The challenge with bonuses is that they arenโt 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. (โHoney I saved $1000โ is much easier to say than โHoney I got us an extra monthโs membershipโ).
Another challenge is working out what bonus item will appeal to your customer.
How to get bonuses right
Look for something with sufficient perceived value, but low cost to you. Itโs 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.
Itโs 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.
Quantum of the bonus. The main product should carry the load here โ the bonus is a nice little something on the side. Itโs difficult to put a number on the ideal proportionality of bonus to the main product, but imagine itโs something like 5-10%. In other words, your bonus shouldnโt be more than 5-10% of the price/value of the main product.
If it is more than this, it becomes a bundle โ rather than a bonus.
Talk it up.
Describe it as being โexclusiveโ so they feel special; use the word โfreeโ because we all love getting free stuff; and include the associated value if itโs impressive (valued at $250, for example). Valued at $5 when youโre selling anything over $10 will not go down well!
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