Skip links

The Psychology of Discounting

Introduction :

Every Keynesian theory assumes that consumers are rational and maximise their utility in order to gain the most for themselves. The everyday definition of “rationality” is “having the ability to reason.” An example of a rational consumer would be a person choosing between two cars. Car B is cheaper than Car A, so the consumer purchases Car B. For most researchers assuming that consumers do take the best action is still an assumption that warrants justification. The economist Richard Thaler pointed out the limitations of the assumption that humans operate as rational actors. Thaler's idea of mental accounting shows how people place greater value on some dollars than others, even though all dollars have the same value. Suppose, Shelly, a buyer is looking to buy a Mobile phone. She saw one for ₹ 990. Another is for ₹ 1100, with a 10% discount – making it ₹ 990. Which one would she choose to buy? Behavioural economics actively demonstrates that the option with a discount will provoke a more complex emotional reaction than the first option. This shows how consumer discounts provoke actions which aren't necessarily rational from an economic point of view. In recent times, this type of consumer behaviour has been studied and used extensively by e-commerce giants to lure customers to their stores. Behind every click on their website, there is internal combustion of emotion, physiology, and hard-wired instincts tempered just slightly by rational thought. Through the course of this article, certain arguments related to the application of rationality and neuroscience in the context of the e-commerce industry would be highlighted. In further parts of this article, the author explored "Why" and "How" understanding various theories related to rational behaviour and discounts are paving the way for e-commerce to be highly profitable. This article has primarily deciphered the mathematics behind the success of mega festive events of e-commerce like the Great Indian Festival sale, Diwali sale etc.

Do consumers really make rational decisions?

Humans make judgments without considering the consequences of their decisions. People believe they are making rational decisions when it comes to making decisions but Ariely explained how humans react to the words "free" and "zero". Dan Ariely, a behavioural economist, claims in his book; Predictably Irrational: The Hidden Forces That Shape Our Decisions, that individuals are significantly less rational than mainstream economic theory suggests, refuting the widely held belief that they behave in fundamentally rational ways. For instance, one can find an example like, a friend who recently drove 20 miles to a supermarket because of a 50% off sale. She bought ₹ 5000 worth of clothing for ₹ 2500. The next day she bought ₹ 1,500 shoes from the local store because it was “only” ₹ 750 more than the one at the main market, which was 10 miles away and “not worth the trip.” Ariely conducted a number of tests to demonstrate his claim. When given a choice between two or more options, the free option was frequently picked. When there's a chance to get something for free, the actual value of the product or service isn't taken into account. Ariely stated, "Most transactions have an upside and a downside, but when something is FREE! People forget the downside.

‘FREE!’ gives such an emotional charge that they perceive what is being offered as immensely more valuable than it really is". Another author Daniel Kahneman explains in his book "Thinking Fast and Slow" that any approach to problem-solving, learning, or discovery that employs a practical method, is not guaranteed to be optimal, perfect, logical, or rational but is instead sufficient for reaching an immediate goal. When making a decision, this heuristic provides us with a mental shortcut that relies on immediate cases that come to our minds. Or easier put: we value information that springs to the mind quickly as being more significant. The same principle applies in the case of a commodity with discounts, when choosing a product, a discount catches the eye of a customer and this first-hand information after getting processed leads to the product being sold as the consumer values this information instead of the real commodity's value.

Customer choice based on Neuromarketing science, How does it help business?

It is a commonly held belief that consumers all around the world are price sensitive. Analysing Consumer Psychology and behaviour is an important tool for a business person to boost their sales. In the business realm, Consumer Psychology assists organisations in improving their products, services, and marketing methods. Consumers spend their time researching and comparing various items. They look at product reviews and may consult with friends. For example, when purchasing a washing machine or television, consumers spend a significant amount of time visiting various stores and evaluating products. One of the ten principles of economics in Gregory Mankiw's book states that "People Respond To Incentives". An incentive is something that induces a person to act in certain specific ways. This is because rational agents make decisions by comparing costs and benefits, price signals usually induce strong emotional responses in all the consumers.

It is a commonly held belief that consumers all around the world are price sensitive. Analysing Consumer Psychology and behaviour is an important tool for a business person to boost their sales. In the business realm, Consumer Psychology assists organisations in improving their products, services, and marketing methods. Consumers spend their time researching and comparing various items. They look at product reviews and may consult with friends. For example, when purchasing a washing machine or television, consumers spend a significant amount of time visiting various stores and evaluating products. One of the ten principles of economics in Gregory Mankiw's book states that "People Respond To Incentives". An incentive is something that induces a person to act in certain specific ways. This is because rational agents make decisions by comparing costs and benefits, price signals usually induce strong emotional responses in all the consumers.

Discounts may appear to be simple. Who, after all, doesn't want to save money, right?

However, pricing psychology extends beyond simply loving a good deal or taking advantage of discount bundles. Researchers have identified various psychological motivators that drive buyers to certain sorts of deals and encourage them to purchase. Because when a customer finds a good deal, it alters the way they think and feel. A study (Alexander, V., Tripp, S., & Zak, P. J. 2015) shows that receiving a major discount led to feelings of excitement, pleasure, happiness, and other positive outcomes among participants. This significant spike in positive feelings was higher post-discount than what they feel after receiving an outright gift! The study confirmed that after receiving a discount, people showed an increase in their oxytocin levels, which is often commonly known as the ‘feel good’ hormone.

The psychology behind deals and discounts, How do those magic red sale signs lure customers into a store?

With the review of a couple of findings from behavioural (and traditional) economics, one gets the explanation of why discounting, both real and fake, is such an effective marketing ploy. The consumer watchdog has always accused e-commerce retailers of misleading customers by proclaiming discounts on their items whose prices have sneakily raised by at least the same percentage. Deep discount methods and offers offered by e-tailers in countries such as India have huge potential for leveraging sales. In a retail store, discounts attract more people, and as a result, retailers have more potential buyers for other items in the store, as most people will look around to see what offers are available before making a purchase. According to the economic effects of the price discounts strategy, a price discount provides a monetary gain and an incentive to encourage consumers to buy a particular product. Consumers perceive a higher level of savings for a product when a higher price discount is provided, which induces them to make a deal. Many Behavioural lessons and managerial implications of deep discount strategies have been used by e-commerce firms to gain a competitive advantage over rivals. The purpose is to understand the behavioural aspects of consumer and competitor response to such online sales, particularly regarding e-satisfaction and e-loyalty. The focus lines of all these research strategies are the behavioural aspects influencing customer attitudes, preferences, and choice and understanding of heuristics involved in consumer decision-making. The case is unique in its applications of behavioural economics principles to e-retailing in India and applying behavioural principles to major e-commerce marketing events in India such as "Big billion day sales" by Flipkart. With the e-commerce industry likely to boom in India, unique insights into competitive pricing strategies adopted by e-retailers and the feasibility thereof are prerequisites.

How are e-commerce giants leveraging sales?

"Decoding end season sales" Usually, Indian families tend to wait till the festive season to undertake high-value purchases such as home appliances and mobile phones because they believe that they would benefit by availing discounts during these festive sales. These festive events like ‘The Big Billion Days’ of Flipkart lure a humongous volume of customers to their websites. Discounts are considered to be a major driver behind high-volume sales and customer loyalty acquired by e-commerce platforms in India, especially through these types of events. In 2007, Flipkart, one of India’s e-commerce giants, received its first order for a book, offering a 10% discount to the buyer. Although such discounts were not part of an effort to increase sales at the time, the e-retail business industry has subsequently relied extensively on these discounts as a tactic to build its consumer base through deals and sales announced every few months. As the major e-commerce players usually launch their seasonal sales to attract customers, we can take a look at the maths behind it. Snapdeal, a Gurgaon-based e-commerce site, announced a two-day sale from Thursday to Friday in March 2022, offering up to 70% off on categories such as home furnishings, fashion, and electronics. The major dominant e-commerce players, Flipkart and Amazon start their festive events in October that run up to Diwali. Amazon's Great Indian Festival Sale is an annual mega online shopping festival where Amazon provides attractive deals and discounts, for Indian shoppers, just before Diwali. During this mega sale event, Amazon claimed that the platform served 99.7% of the pin codes in the country.

Amazon also doubled its net income to $14.3 billion compared to Q4 last year. Around 30,000 sellers are reported to clock sales worth over $100,000 during the ‘Great Indian Festival’ event. Amazon India had said that events like festive sales helped the firms bring the next 100 million customers online. Another e-commerce giant, Myntra stated that their festive sale event attracted five million customers who placed eight million orders across a variety of categories. "During the eight-day event, over 2,600 retailers from over 300 brands from over 40 cities participated in the Big Fashion Festival, offering over 1.2 lakh styles," said Amar Nagaram, CEO of Myntra. Such type of Festive Sales caters majorly to the huge festive season demand. Every year, It has a purpose to just lure the customer the right way with discounts and more. They use strategies like "Customers can buy their desired smartphones and avail up to 40% discount." Pretty simple: by discounting your product(s), you're more likely to sell more of them. More specifically, you'll attract new customers more easily. If you offer products that are the same or comparable to those offered by a rival but at a slightly cheaper price, new buyers will be more likely to use price as a deciding factor. These retailers also use price anchoring, a behavioural economics approach that assumes people make judgments based on the first piece of information they are offered. A common principle behind such growth in sales and volume is a quantity discount policy used that is designed according to buyers' cost and demand structures and their "rational" economic behaviour which can substantially stimulate demand and significantly increase profits for both the supplier and buyers.

Conclusion

In the past few decades multi-store retailers, particularly those with 100 or more stores, have experienced significant growth. The reason for this is that buyers do not want to lose out on a good deal. This article analysed the under-researched yet rapidly growing strategy used by e-commerce these days. Using neuro-based, rationality and behaviour economics theories, this exploratory study considers the effects of price discounts, which are the price promotions that involve discounts, on consumers' perception of a product and how this tool is being effectively used by businesses in their sale events, which attracts a large volume of customers. Discount strategy increases conversions. We often find people making unexpected purchases, influenced by discounts being offered on products. Offers have always been a tool for attracting consumers and potential customers of every advertiser, to promote footfall to stores or, in the new media age, to visit the platform (manufacturer/own marketeer's website or an intermediary website) where the products are offered online. To increase sales, these business minds provide purchasing incentives such as free shipping, time-sensitive discounts, bonus samples, extra free features, and hassle-free returns. All of these reduce buying friction and engage customers in seeing their purchases through. One of the main reasons behind the big successful e-commerce start-ups is that they keep focusing on their customer’s interests, behaviour and demands. Over the years, Swiggy and Zomato have also offered significant discounts and they have been a key driver in acquiring customers in their segments. These e-commerce startups use innovative ways to get a quick rise in their revenue growth. Nowadays, after getting a sense of what exactly the "rational" behaviour of the consumer has to offer them, they can simply lure customers to spend more on their e-commerce website. Sanya Tiwari Undergraduate Student at SRCC

References:

Impact of flash sales on consumers & e-commerce industry in india by Joshi Sujata, Domb Menachem, Thakur Viraj, Annual international conference on qualitative &

quantitative economics research, 11-19, 2017 30K Sellers Surpassed $100K In Sales, During Great Indian Festival: Amazon, Chetan Thathoo, Inc42 Media, 2022 The consumer psychology of brands, 2012 Bernd Schmitt, Journal of consumer Psychology 22 (1), 7-17, Neuromarketing: the next step in market research?. Eureka, 1(1), 34-

42. Alexander, V., Tripp, S., & Zak, P. J. (2015). Preliminary evidence for the neurophysiologic effects of online coupons: Changes in oxytocin, stress, and mood. Psychology & Marketing, 32(9), 977-986. Tan, W. K., & Chen, B. H. (2021).

Enhancing subscription-based ecommerce services through gambled price discounts. Journal of Retailing and Consumer Services, 61, 102525. Quantity discount pricing

policies for heterogeneous retailers with price sensitive demand, Wang & Wang - Naval Research Logistics - 2005 Thathoo, C. (2022, February 4). 30K Amazon Sellers Surpassed $100K In Sales During Great Indian Festival. Inc42 Media. https://inc42.com/buzz/amazon-india-q4-sales-grows-9-yoy-to-137-4-bn-beats-previous-records/ Wang, Q., & Wang, R. (2005). Quantity discount

pricing policies for heterogeneous retailers with price sensitive demand. Naval Research Logistics, 52(7), 645–658. https://doi.org/10.1002/nav.20103 Kay, M. (2019, July 31). Ecommerce Discounts: the Good, the Bad, and How to Know What’s Best For You - Conversational Commerce Strategy | Jumper.ai Blog. Conversational

Commerce Strategy | Jumper.ai Blog. https://insights.jumper.ai/ecommerce-discounts/ Moss, G. (2014, February 27). Consumer Behaviour at Amazon. A case study of mobile phones sold by Amazon UK. GRIN. https://www.grin.com/document/269821 Jayakumar, T. (2016).

Behavioral lessons from Flipkart’s Big-Billion Day sale. Competitiveness Review, 26(4), 453–475. https://doi.org/10.1108/cr-03-2015-0019 Amazon festival sales draws 79% of new customers from small towns, cities. (2021, October 31). https://www.thehindubusinessline.com/info-tech/amazons-festival-sales-draws-79-of-new-customers-from-small-towns-cities/article37271611.ece/amp/ Kresic, M. (2020, January 31).

Discounting, Sales Psychology And Behavioral Economics. Forbes. https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2020/01/31/discounting-sales-psychology-and-behavioral-economics/?sh=1bdd9483242b Do Discount Rates Affect Behaviors Like Saving and Smoking? (n.d.). NBER.

https://www.nber.org/bah/2008no3/do-discount-rates-affect-behaviors-saving-and-smoking Online, E. (2019, October 11). Amazon, Flipkart generate Rs 19,000 cr in festive sales, Flipkart takes lead. The Economic Times. https://m.economictimes.com/small-biz/startups/newsbuzz/amazon-flipkart-sales-generate-rs-19000-crore-in-6-days/articleshow/71491146.cms

Leave a comment

This website uses cookies to improve your web experience.