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.
How true Roger. Precisely why Steve Jobs’ response to lowering the price of an iPod was
“no.” Instead, he introduced the iPod nano.
I agree, Bonnie, it’s always better to introduce a product variant vs. simply slashing the price. Of course, Jobs chose to male the new iPhone is a better product at a cheaper price.
Fantastic article Roger, anything discounted or free for that matter will certainly be devalued by the customer. I remember a specific instance, when my erstwhile company was associating with a long distance run in Bangalore.
They decided to do away with the entry fee for employees. Though a great gesture, my guess is that of the 1500+ registrants, not more than 150 ran.
Interesting extrapolation ? discount equals less value; but is it true? My question goes back to the original study. Were the results normalized for demographic differences? Suppose the discount ticket customers were aspirational buyers who normally could not afford the time or cost of regular priced theater tickets or theater goers with limited leisure time who rationalized their higher ?sunk? cost by rationalizing the missed plays as an opportunity cost. These are just two scenarios that separate cost and value. Without reviewing the original study, I think associating discounted cost with lower value based on a secondary interpretation is closer to speculation than established fact.
Just what I needed to read, thanks for making me think about discount in terms of my consulting service. I charge by the hour, and clients pay in advance for my time and for my only two package-service “products” — one is $950, a much-much less extensive package is $500. As soon as I started offering the lower-priced one, not a single person has ever bought the higher price one (which was my goal, since my ROI is much higher with the lower priced package.)
I often give a ‘courtesy discount” when there’s additional time that I invoice for (for a variety of reasons), but hate to call it a discount, because I don’t want them to think my time is worth less than the $100/hr they pay normally. So I’ll offer one or two “courtesy hours” so my fee looks like it stays the same and they feel like they’re getting a gift — but now I’m wondering if I got that right at all… hmmm…. any other service-billing readers out there run into this issue? (Thanks for the must-read blog!)
Those both sound like excellent approaches, GP. You have positioned the package you prefer to sell as a better value, and obviously your clients are being steered in that direction. I agree that a “courtesy hour” or two are a better approach than a lower hourly rate. Not only does it not establish an anchor price at the lower rate, it’s a bit harder for the client to expect the same reduced rate in the future.
Thanks for stopping by!
Before everyone thinks that discounts are always a bad idea, I believe there are some business models where this behavior may be part of the strategy. Consider the case of a gym owner that wants to reduce the gym occupancy but make it up with a larger number of members.
Compared to other gyms, a low-monthly membership price makes the experience less satisfying reducing the likelihood gym members will attend (i.e. lower occupancy). He can then market and keep a larger number of gym members since the gym occupancy is low enough that prospective members will see that the gym is not full at all. New members will mistakenly think that the gym is not doing well at all. In reality, the gym is likely substantially oversubscribed as compared to other gyms and probably doing a great business.
One could argue that, in the gym business, a large majority of the membership does not enjoy working out anyways. But, I would venture to guess that the lower-price anchor of discount gyms further depresses the enjoyment of the experience leading to even lower occupancies. And, since it is such a low price as compared to other gyms, one might not cancel their membership in the oft chance they might attend sometime in the month.
I kind have to agree with jack, It sounds like the people who bought the 15$ tickets were probably people who frequented plays more often than someone who bought the 2 dollar ticket.