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The Psychology of Discounts: Understanding Consumer Behavior and Decision-Making in Retail
In the fast-paced world of retail, discounts have become a powerful tool for enticing consumers and driving sales. However, behind the scenes, there is a fascinating interplay between psychology and consumer behavior that shapes the effectiveness of these discounts.
When faced with a discount, consumers often experience a surge of excitement and a sense of urgency. The allure of saving money, coupled with the fear of missing out on a limited-time offer, can trigger impulsive buying behavior. Retailers are well aware of the psychological response and strategically use discounts to drive sales and bring about that urgency.
Customers don’t just want discounts, though; they wait for them. According to consulting and research firm 2 Visions’ Q2 2023 Ecommerce Discounting & Promotions Report, 62% of shoppers will actually delay a clothing purchase until they get a discount. The firm’s discovery also notes, “This phenomenon isn’t limited to a specific demographic or socioeconomic bracket; instead, it pervades across all customer segments.”
Perception of Value
One aspect of consumer behavior that influences decision-making in the face of discounts is the perception of value. Consumers evaluate the worth of a discounted item by comparing it to its original price.
The larger the discount, the greater the perceived value. For instance, the 2 Visions report states, “Shoppers are approximately 2x more likely to purchase a product with a 20% discount over a product at average cost. This likelihood rises dramatically to 99% when the discount offered is 50% as opposed to 20%.”
Retailers leverage this perception of value by prominently displaying the original price alongside the discounted price in order to highlight the savings and encourage consumers to make the purchase.
Social Proof
Another critical factor is the influence of social proof. People often look to other customers or their own family and friends for cues on how to behave and make decisions.
Retailers capitalize on this by employing strategies like displaying the number of items sold or using testimonials to create a sense of popularity and trust. Seeing that others have taken advantage of a discount can sway consumers’ decisions, making them more likely to follow suit.
Power of Scarcity
The power of scarcity cannot be underestimated, either. As noted by HubSpot, psychologist Dr. Robert Cialdini came up with the “scarcity principle of persuasion,” which means that products or offers become more valuable to consumers when they are rarer or harder to obtain.
Exclusive discounts, limited-time offers like flash sales, and products in short supply evoke a fear of missing out. Retailers skillfully tap into this fear, urging consumers to act quickly before the opportunity vanishes.
According to 2 Visions, shoppers are only 7.6% more likely to buy a typical, normally priced item because of scarcity, but “if the selling out item is also discounted by 30%, shoppers are then 178% more likely to purchase.”
While discounts can be powerful motivators, consumers are becoming increasingly savvy and perceptive. They are now more inclined to research and compare prices across different retailers before making a purchase. Price comparison websites and apps have empowered consumers to seek the best deals, making it essential for retailers to offer competitive discounts to capture their attention.
The psychology of discounts plays a pivotal role in shaping consumer behavior and decision-making in retail. Understanding the factors involved enables retailers to craft compelling strategies that appeal to consumers’ emotions and rationality, ultimately fostering long-term customer loyalty in a highly competitive market.
Discussion Questions
DISCUSSION QUESTIONS: How can retailers strike a balance between offering competitive discounts to attract customers while maintaining profitability? Are there any strategies that allow retailers to optimize discounts without sacrificing their bottom line?
Poll
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You have asked a question that is the magic of retail. How to get them to buy and still make money. One technique is to offer discounts on items that pair with accessories which are priced at normal markup. This is especially useful in home improvement but harder to execute in fashion but not impossible. Discounts by customer seems to be where we are heading and leveraging AI will be critical.
There’s a difference between saying that discounts are powerful and customers recognizing that paying “regular” price is just plain crazy. The ubiquity and frequency of promotions and discounts in the market have trained customers to wait. Spend 10 minutes on your phone. There’s a deal out there somewhere.
Differentiation + scarcity is the antidote. But that’s an extremely difficult combination to manage and scale on an ongoing basis.
Consumers increasingly prioritize discounts over other variables when making purchase decisions. This is difficult for retailers considering it’s not sustainable to repeatedly drop prices and erode margins. Retailers will be pressed to become more strategic with how they offer discounts and how they create more cost efficiencies in admirable ways (versus compromising the integrity of their supply chain).
Bob,
I don’t know if GAI is to blame. It is after all a promising technology. This survey seems to have been conducted by somebody with a fairly superficial understanding of price elasticity. I agree. We could be doing better.
Consumers are very savvy in terms of understanding retail pricing which means retailers must be strategic in the use of discounts. For example, Macy’s and Bed Bath & Beyond (oops, Overstock) have trained us all not to buy without a coupon. Retailers who don’t apply data science and behavioral economics to their revenue growth management are missing out.
The ship has sailed. It has taken decades for retailers to teach shoppers not to buy today because tomorrow is irrelevant, and they should plan that it will be cheaper. Retailers have their ideas, which aren’t very creative, to make choppers buy what they don’t need nor don’t want and pay more than it’s worth. After all, it’s their job.
The first thing all retailers should do is understand the tagged price is fiction. Do your planning on the net price. Then do the reverse math to get the tagged price.
Gene,
Well said. I think most good retailers already understand the importance of price elasticity and overall price impression versus “tagged price.”
In response to yesterday’s piece about buyer’s remorse, I tried to make the point that retailers may have a trust problem that isn’t being addressed out loud. Do consumers really trust the claim of a “discount?” The fact that they are more likely to buy “discounted” merchandise does not equate to “trust.”
And don’t get me started on the ubiquitous retail tease “Up to…”
Good point. I think the shopper knows the “discount” price is made up. But they can’t resist the word.
Supply and demand is key. Always has been and always will be. If supply is short and demand is high the discount is irrelevant. If the item or need is discretionary, then naturally the consumer will wait to make a purchase until a “deal” is found or arrives on their phone, email or affiliate coupon site. Now finding buyers that don’t buy on deals and thus have a better margin on their average ticket, that is nirvana. Likewise, having online adaptive tools in place that adjust discounting/ offers in real-time based on the individual shopper is something to be explored!
I am amazed at how hard retailers work to give margin away, and how most of them do so with no understanding of what’s really at play – whether the promotion is profitable, whether it incentivized the right customer behavior, or whether the right customers responded. So much margin is given away through “we’ve always done it that way” and also “but if we stop, sales fall (even if we don’t know why)”. And don’t get me started on employee discounts! I’ve never seen retailers work so hard on discounts for employees that, what, make up 3-4% of overall sales on a really good day? I definitely don’t see the cycle ending any time soon!
I am actually doing a presentation on this tomorrow. It involves the definition of the perceived value proposition and the levers a retailer can change to grow revenue, provide stability, and increase market share. The elements are the same as they have been for ages- retail pricing 101.
You have asked a question that is the magic of retail. How to get them to buy and still make money. One technique is to offer discounts on items that pair with accessories which are priced at normal markup. This is especially useful in home improvement but harder to execute in fashion but not impossible. Limiting returns also helps by leveraging AI.
The retail industry is in an interesting position, with economic conditions driving consumers to be more cost-conscious and retailers sitting with surplus inventory levels as they continue to navigate the remnants from the supply-chain shortages. With brand loyalty declining, brands today are forced to lean into discounts and limited-time offers to attract new and existing customers. However, to ensure they are discounting the right products at the right time, it’s critical they rely on AI and data to make informed decisions to maximize revenue.
The best way to maintain profitability without sacrificing the bottom line in retail promotions is to avoid price wars…only the consumer wins price wars and they may not return after the war is over and normal prices resume.
Retailers are savvy promotional strategitist and experts in consumer behavior. Even more, they are experts in their specific customer behaviors. By showing actual vs discounted price, using easy to qualify savings ($2 off vs 20%) and featuring high margin sale items to loyal customers, retailers have an opportunity to retain their customer base with their own unique value proposition.
Not much a brand can do. about consumers shopping around for discounts & discount codes online. However, shoppers that are going to buy from your brand on impulse or without shopping around, there is an opportunity for in session analytics that will provide discounts only to shoppers that need an extra nudge. Rather than blanket 10% off site wide discounts.
With the market volatility we’ve experienced this year, it’s never been more critical for retailers to have access to local promotional insights, especially as it relates to the competition. Without access to this level of data, they lack the knowledge needed to find a balance between offering competitive promotions while maintaining profitability.