Here’s a fun fact: When given a choice, most consumers will choose a “bonus” over a “discount”, even if the discount is a better financial offer for them.
Why is that? Why do we consumers (yes, I’m a consumer too!) lean towards getting more “bang for our buck” than actually saving a buck? This seems counter-intuitive.
Well, as it turns out, we’re programmed that way.
We assimilate marketing offers like “Get 33% more free” into our GAINS column, and shuffle the savings-offers like “25% off” into our LOSSES column.
Our brains don’t think we’re saving 25%; instead our brains view it as reducing our losses.
Basically, this means the consumer doesn’t want to spend the time and energy to compute a product’s base value. Who wants to figure out what 25% off a $15 item is?
Consumers want an easy transaction, and will almost always choose what sounds like the best deal. To them, 33% more FREE sounds like the better offer.
The research proves this to be true. A recent study by some smart folks at the Carlson School of Management highlights just how powerful this psychological preference is.
The study points to Prospect Theory, which describes how people evaluate gains/losses and make a determination between probabilistic alternatives.
Carlon’s researchers called it “base-value” neglect”.
Consumers are bad at math.
Quick, which is the better offer? A 25% off plus an additional 20%…. OR, a 40% off deal?
Most people will quickly say 25 + 20 is obviously better than 40. Of course, right? 45% off is a better deal than 40%.
But look more closely…they’re actually economically equivalent. $100 – 25% is $75. Then an additional 20% off brings us to $60. Same as the 40% offer.
So what’s the big deal? Who cares, right?
Well, your consumers do. And they vote with their dollars. And it turns out you’re going to sell more of your products if you offer the double discount of 25% plus an additional 20%, rather than 40%.
Sometimes, a lot more.
That Carlson team ran a number of studies, and one of them was with a US retailer. They ran two different promo offers on a 9oz. bottle of hand lotion that is usually priced at $13.50.
The first offer was “50% More Free”, and the second offer was at a 35% discount. The 35% discount was economically superior between the two (97.5 cents/ounce versus $1/ounce).
For 16 weeks, the retailer ran each offer for a week at a time, alternating back and forth.
Get this: the store sold 73% more of the product when it was marketed at “50% more free”.
That’s a HUGE increase. This stuff works.
If consumers neglect the base value associated with percentages, they should generally prefer a bonus pack over the economically equivalent price discount. This is because, mathematically, the percentage associated with a price discount is always smaller than the percentage associated with the economically equivalent bonus pack. For example, for a price discount of 33.33%, the economically equivalent bonus pack quantity increment is 50%. If consumers ignore the base values associated with the percentages, they will compare 33.33% with 50% directly, without paying attention to the differences in their bases. As a result, consumers will prefer the higher percentage associated with a bonus pack over the lower percentage associated with the economically equivalent price discount.
The two core takeaways from the Carlson study are:
- When both offers are expressed in percentage terms (50% more FREE vs. 33% off), consumers prefer bonuses.
- When given the choice between product quantity decrease, and economically equivalent price increase, consumers prefer quantity decreases.
Wait! You’d best keep reading!
This is brilliant stuff, right? I know I was extremely excited when I read this study. I couldn’t wait to rush out there and apply this to my own marketing campaigns.
Well, as usual, there are some caveats to keep in mind with this study.
This base-value neglect works wonders on inexpensive products across many product categories. If you sell toilet paper, batteries, low-priced clothing, etc., then this study is of use.
If you market LED TVs or running shoes, then the base-value neglect really doesn’t apply.
Consumers of expensive products show a preference to price discounts; on a larger scale, reductions in losses are preferred to incremental gains.
Pandering to Vice
Interestingly, when it comes to vice/virtue products across categories (for movies, think Rambo vs. Cinderella), consumers prefer a bonus pack over an economically-superior discount on virtuous products. That’s flipped for vice products, due to feelings of guilt associated with these products.
For more on vice/virtue, I’d recommend exploring a Carnegie Mellon paper titled “How Purchase Behavior Differs for Vice and Virtue Products“. They dive into neural systems, psychological triggers, and more.
For Better or Worse
Final caveat from the report: when it comes to comparative marketing or advertising, the target brand will resonate more positively with consumer if it refers to its advantages, versus focusing on the competitor’s disadvantages.
So, if I’m trying to market tires, I’ll do better to say something like “Zack’s tires are 20% better and stop in a shorter distance than Bob’s tires”.
This is much better than saying “Bob’s tires are 20% worse than Zack’s and stop in a much longer distance. You’ll probably die, unless you buy from Zack.”
One of the best-known examples of this is Avis.
Their “We Try Harder” campaign is one of the longest-lasting and most-successful ad campaigns ever. It worked for a many number of reasons, but part of it is the “better” message. They didn’t say their competitors try not-as-hard.
How to Make It Work
The Carlson report ends with the researchers outlying some managerially-relevant boundary conditions.
When the ease of comparing the two offers increases, the value of base-value neglect decreases. That is, most consumers can tell that 100% more product is the equivalent to 50% off.
But the math gets harder for consumers when it becomes “50% more” and “33% off” At a glance, which is the better offer? Are they the same?.
Additionally, the closer the proximity the two numerical offers are, the harder it is for the consumer to calculate value. I can quickly tell that 50% and 33% differ by 17%, and that it’s immediately attractive.
However, it’s much harder for me to perceive what’s a good offer if it’s 20% more or a 18% discount. The two numbers are in close proximity and base-value neglect ceases to be relevant.
Consumers are also indifferent when the numerical percentage is the same: 25% off or 25% more. However, the more expensive an item is, the more the discount is preferred.
Lastly, the familiar a product is to the consumer, the more they will prefer a bonus over a discount. Conversely, if it’s an unfamiliar product, there’s a higher “risk” of acquisition and the consumer will prefer the discount.
>>>What I’ve taken away from the study is that I have a lot of opportunity to be creative in my marketing efforts. The company I work for sells a big variety of products at highly variable price points.
Site-wide offers will probably never be my best bet. I think I’ll focus on highly-targeted offers for specifics product categories and test the bonus vs. discount theory myself.
I’m pretty sure I’ll know what will happen!