Danger in Discounts
I’m a sucker for discounts. Show me something that costs $50, tell me I can have it for $25, and my hand will be reaching for my wallet while my brain is still trying to figure out whether I need the item at any price. Most of us respond that way – our brains are wired for it. Part of this effect is that the regular price is an anchor (see Anchor Pricing Strategies), and the discount price is a little voice in our head screaming, “bargain!”
Some dusty research at Ohio State shows that discount pricing isn’t always an unadulterated blessing. Beyond the obvious fact that it reduces profit margins, and that it might create a new, lower price anchor in the minds of customers, discounting can reduce customers’ enjoyment of the product! In 1985, long before neuromarketing and neuroeconomics were hot buzzwords, OSU researchers Hal R. Arkes and Catherine Blumer published, “The Psychology of Sunk Cost.” This oft-cited paper observed the behavior of theatre patrons who purchased tickets at different prices.
In this experiment, summarized in Sway by Ori Brafman and Rom Brafman, some season-ticket purchasers paid the full price of $15 (maybe we should scale these numbers for inflation!), while others received either a $2 or $7 discount. The discount ticket purchasers were aware that the regular price was $15. The tickets were all sold as the patrons entered the first play in the series, so all attended at least the first play.
From a purely rational standpoint, one would have expected no difference in the number of plays attended between the groups. They either enjoyed the plays or not, they had season tickets, so the price paid should make no difference. Of course, the price paid DID make a difference. The patrons who paid full price attended significantly more plays than either of the discount groups.
We can all identify with the “sunk cost” phenomenon. If we bought something expensive, we are more likely to force ourselves to use it than had we paid much less for it. We don’t want to admit we made a mistake, and we want to justify our investment in it.
Interestingly, though, there seemed to be something more at work in this study than the need for the theater patrons to justify their purchase. The two discount groups attended at about the same lower rate. So, those who paid $13 instead of $15 – even in 1985, not much of a difference – attended the same number of plays as those who had paid about half price for their tickets.
The inescapable conclusion is that the modest discount devalued the tickets in a significant way, and perhaps led to a less enjoyable theater-going experience.
Discount pricing is a powerful tool, but beware of its negative effects. Marketers should go out of their way to emphasize the quality of their product even as they tout its value. By being aware that the discount price has the potential to “damage” the product, they can take steps to counteract that effect.