The Psychology of Discounting

This is a good reminder in The Economist of how marketers take advantage of consumers’ innumeracy:

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).

This numerical blind spot remains even when the deal clearly favours the discounted product. In another experiment, this time on his undergraduates, Mr Rao offered two deals on loose coffee beans: 33% extra free or 33% off the price. The discount is by far the better proposition, but the supposedly clever students viewed them as equivalent.

Studies have shown other ways in which retailers can exploit consumers’ innumeracy. One is to befuddle them with double discounting. 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.

Consider a $100 product that’s been discounted 20%, then 20%, then 20% once again. If someone asked you whether you’d take that deal versus a one-time discount of 60%, choose the latter. The difference is paying $51.2 with the initial (three-time) discounting versus $40 via the one-time 60% discount.

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