It's time for quick quiz for eager retailers who're interested in selling more of their products.
If presented with the following three deals, which do you think would yield the highest percentage off?
- Buy a pair of pants for $80 and get the second pair at 50% off.
- Save $400 on a sofa priced at $1,999.
- A necklace marked down to $52 from $75.
Perhaps surprisingly, the correct answer is the third deal at 30% off.
If you were unable to spot the difference in the deals quickly, you’re in the same boat as most shoppers today. Hint: most of us don’t whip out calculators to ensure we’re scoring a deal, and it’s our biological makeup that predicts most of us will rely on relative proportions when deciding whether to pull the trigger.
When it comes to creating discounts that will trigger buying behavior, setting up sale prices is equal parts psychology and marketing presentation skills. So, how can smart retailers move merchandise by appealing to the human psyche? Let’s start by exploring the different types of discounts and consider why they might work.
Experiment In-Store With Discount Types
Below are some of the most commonly used promotion types. To gain insight into which of these drive sales with your particular customer base, experiment with each until you find the lift you’re looking for.
This translates to “Buy One, Get One,” and can be used to encourage shoppers to consider additional items in your store. For example, you can advertise “Buy one, get 50% off the second” or “Buy one, get one free.”
Reduced percentage or dollar amount
This is likely the discount type you’ve seen most often, and it can be applied to a specific product or your entire store. For example, get $50 or 50% off.
Tempt shoppers to buy multiple items in order to unlock this promotion type. This works best on smaller ticket items. For example, buy five items and get the sixth for free. This can help encourage impulse purchases, and helps increase the average sale amount per transaction.
Gift with purchase
Shoppers love freebies. If they’re on the fence about a purchase, or if they’re choosing deciding between you and a competitor, a free gift might be just the push they need to purchase.
In this scenario, the savings occur after the initial purchase and is actioned by the shopper (typically by mailing in a coupon). Although the barrier to savings is higher, this works well on higher-ticket items, if the discount is worth it.
Testing variations of the above discounts can be costly. Keep your eye on profit margins and ensure you’re comfortable crunching the numbers.
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Why Do Discounts Work?
It goes without saying that most of us will take a deal if the option is available. But why? There are a few psychological factors at play that are worth taking a look at.
1. Sigmund Freud’s pleasure principle is the idea that we’re hardwired to seek immediate pleasure and avoid pain.
How to put this to use: Stir up a sense of urgency for shoppers with a flash sale. Observe whether you can successfully tap into this instinctual drive buried deep within our subconscious by positioning your products as “buy now or regret later.” Use bold signage in warm colors that screams “Last Chance!”
Retailers like Zara, which sells luxury fashion at mid-level prices, build that sense of urgency into their product lifecycle. They don’t replenish stock frequently, but still have a high product turnover. Shoppers know that if they don’t buy what they see immediately, they may miss their chance altogether.
2. Humans aren’t great with processing large numbers. According to this short video from eBay Deals, we can develop expectations around what the correct result of a simple equation should be as infants. But as numbers and equations grow more complex, understanding doesn’t come as naturally and we look to the proportion of two numbers.
How to put this to use: Most of us can’t comprehend that a 50% increase in quantity is equivalent to 33% savings on the price. Instead of doing any sort of complicated math, shoppers are more likely to be enticed by a free gift with their purchase. Choose a gift that will help promote your brand by exposing a shopper to something new and encourage them to come back.
For example, every year Sephora sends a special gift to all members of their rewards program. Beyond that, shoppers get their pick of free samples at checkout in-store and online.
3. Professor and researcher E. Tory Higgins formulated the regulatory focus theory, which explores the relationship between a person’s motivation and how they achieve a goal. Human motivation is rooted in advancement (think gain) and security (think avoiding loss). Our decisions can be affected by whether we lean towards promotion or prevention as well as our state of mind in different situations.
How to put this to use: Consider the wording you choose to promote your discount. “GET 25% off” appeals to our need to achieve a gain, while “SAVE 25%” speaks to our need to avoid a loss. A recent study affirmed that shoppers who are promotion-focused respond better to sale materials that include the “Get” phrasing.
Learn more: Merchandise planning tips from savvy ecommerce directors
A Cautionary Tale: A Couponing and Sales Case Study
In 2012, J.C. Penney implemented a “best price strategy” that guaranteed everyday, low prices and moved away from couponing. The aim was a more simple, predictable pricing strategy that used whole numbers ($20 versus $19.99), easy to decipher tags and focused less on sales. As a result of the change, store traffic dropped by 10% and sales decreased by more than 20%.
Why did this happen? Behavioral economics tells us that straight-forward strategies don’t always yield the results we’d expect. Humans can be irrational. J.C. Penney’s customers were accustomed to their frequent sales and responded well to their original model. Since then, the company reverted back to this approach and has seen a substantial increase in earnings.
The science of sales lies in knowing your customer. Look beyond any discount to find the right discount that will drive sales and result in happy, repeat shoppers. Or, perhaps your business should adopt a strategy of no discounts. It all depends on your unique customers.
Which discounts have you noticed worked best with your customers?