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The Psychology of Discounting

Wednesday, July 11, 2012
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I’ve been reading Thinking, Fast and Slow and am rapidly losing confidence in what I thought was my finely tuned intellect guiding me towards rational decisions(!)  Instead, I’m pretty sure many of my choices and preferences are based on the flimsiest of hunches.  And it would seem that when shoppers think they are identifying bargains, their instincts are very often wrong.

According to The Economist, a team of researchers have looked at consumers’ attitudes to discounting. Shoppers, they found, much prefer getting something extra free to getting something cheaper. The main reason is that most people are useless at fractions.

How good do you think you are at very basic maths?

Consumers often struggle to realise, for example, that a 50% increase in quantity is the same as a 33% discount in price. They overwhelmingly assume the former is better value. In an experiment, the researchers sold 73% more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount (even after all other effects, such as a desire to stockpile, were controlled for). In another experiment the subjects were offered two deals on loose coffee beans: 33% extra free or 33% off the price. The discount is by far the better deal, but the subjects viewed them as equivalent. Similarly, people are more likely to see a bargain in a product that has been reduced by 20%, and then by an additional 25%, than one which has been subject to an equivalent, one-off, 40% reduction. The two discounts are the same.

There’s a clear implication here about the ability of marketing types to inform and persuade us. Percentages, fractions and statistics seem to baffle a huge proportion of people. Perhaps we need protection in the form of laws that require firms to very prominently display unit prices in shops and advertisements. We’re already protected to some extent, but (sometimes amusing, sometimes deliberate) retailer errors are common!


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