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customer psychology

 

Discounts are supposed to boost sales, right? So why do they sometimes feel like setting fire to your profits? You slash prices hoping for a flood of customers, but all you get is a trickle. And you’re not alone; most businesses do discounts dead wrong and they’re leaving money on the table. Let’s explore how to get it back using science.

The Problem with Deep Discounts

Ever wonder why those 80% off signs sometimes scream desperation instead of value? A 2018 study by Zike Cao, Kai-Lung Hui, and Hong Xu, published in Information Systems Research analyzed nearly 20,000 daily deals and found something shocking: discounts over 60% can actually backfire. They make people think your product is cheap and not a bargain, causing quality perception to plummet along with your sales.

Study on discounts and sales

I once consulted with a software business struggling with slow sales. They were constantly discounting at the end of the quarter, up to 70% off, trying to make their numbers. Yet, the more they discounted, the fewer customers they attracted. Customers were avoiding them, assuming the product wasn’t good or that the company was in financial trouble.

Understanding Customer Psychology

This isn’t just for bargain basement brands. Another study looked at 1.8 million sales on Groupon and found that even small increases past the 55% average discount resulted in decreased sales across the board. For instance, if you’re selling a premium coffee maker for $100, slashing the price down to $40 might seem like a great deal, but it triggers alarm bells in your customer’s mind. They start to think, “What’s wrong with it? Is it a knockoff? Is it defective?” However, at 55% off, that’s $45, and suddenly it feels like a premium product at a steal.

Premium product pricing

This reminds me of when I started my marketing agency. I thought low prices would attract more customers, so I discounted my services to about $599 a month. Month after month, I was disappointed with the lower quality clients and sales objections from prospects. So I tested a higher price point of $1,500, which worked. I then tried $2,500, and that worked too. I reached $5,000 a month (eventually, $25,000/month), and each time my close rates increased. It was confusing at first, but I learned that by positioning my services as a premium offering, I attracted more and better customers.

The Importance of Pricing Strategy

This taught me a valuable lesson about the psychology of pricing. Before diving into how to test your discounts to maximize revenue, let me share the framework I use. You need a system for testing and scaling all your marketing efforts, including pricing. That’s where my Scale with Science Protocol comes in (available for free at the link below).

Three Stages of Testing

  1. Directional Testing: This is where we quickly and cheaply eliminate losing discounts. You only need $50 to run this test. Create two ads – one with a dollars-off discount (express as $X off) and one with a percentage-off discount (Y% off). Run them on Facebook or Instagram, targeting your ideal customer. This isn’t about making sales; it’s about measuring which gets clicked on the most.
  2. Statistical Testing: After identifying the winner from the first phase, you refine that message to turn clicks into conversions. Test various dollar amounts or percentage discounts to find the best return on investment.
  3. Revenue Testing: Finally, you get to scale your proven winner and optimize for maximum profit. This is where you launch pre-order campaigns or limited-time offers using the discount that works best.

Testing framework for discounts

The Right Type of Discount

Research shows that the type of discount matters depending on the price point. For products over $100, customers respond best to a dollar amount off. For example, a $600 laptop with $150 off feels better than 25% off. But for products under $100, percentages are more persuasive; for a $50 sweatshirt, 20% off feels more significant than a $10 discount.

Applying the Framework

You might be wondering how to apply all this to your products or services. Pricing can feel like a black box, but I’ve compiled over 45 research papers on pricing into a simple flowchart, which you can get for free below. This eliminates the guesswork, so no more gut feelings – just proven strategies.

Conclusion

Discounts are a powerful tool, but they’re only one piece of the revenue puzzle. If you’re ready to take your business to the next level, click on the link to download the Scale with Science Protocol and learn how to maximize your pricing strategy. Remember, effective pricing is about understanding your customer’s perception and testing different approaches to find what truly works.

 

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