The Fascinating Psychology Behind Discounts and Promotions

When designing promotional campaigns for your ecommerce business, you certainly think about the essentials: the discount terms and conditions, the promotion budget, and the target audience. There is another crucial aspect to consider, though: the psychological mechanisms that condition people’s responses to discounts and promotions. Dive deep into this article to find out more about the fascinating psychology of promotional marketing.

Why promotions psychology matters?

As people spend around 4:30 hours per day on their phones, brands get a chance to be closer to their customers. Alongside this trend, the rise of direct-to-consumer companies means that the stakes are high when it comes to both customer acquisition and keeping customers loyal and engaged in the long term.

Figuring out a way to develop and maintain relationships with the consumer is challenging on many levels: from data collection, to software integration, communication, and calculating the promotional budget. That’s why introducing or reintroducing sales promotions at random may get expensive very fast and fail to create value for a company.

Instead, it’s a good idea to respond to your customer needs, also the subconscious ones. Based on typical consumer behavior patterns and cognitive schemas, you can apply marketing psychology and intelligent pricing strategies to increase your conversion rates, motivate people to use your offers, and meet your own business goals.

First steps in promotions psychology

Designing any promotional campaign should start with creating value both for the consumer and for the business. This boils down to leveraging the gaps between a consumer’s perceived value of something and your cost of providing it.

To do this successfully, have a close look at the promotion psychology insights below. We hope to help you identify such gaps and create offers that are valued by consumers but cost you very little.

To learn more details about particular marketing psychology phenomena and the science behind them, check out the dedicated posts below:

• The Psychology of Free Shipping.
• The Endowment Effect – Why Ownership Increases Product Value?
• The Decoy Effect – How to Compare Products?
• The Licensing Effect – Why Does the Sense of Doing Good Make Customers Spend More?
• The Introduction to Reference Pricing.
• The Foot in The Door Technique.
• Primacy and Recency Effects for Ordering Items.
• How to Apply the Shopping Momentum in Your Sales Strategy?
• The Psychology Behind Ego Depletion.
• The Blemishing Effect – How Negative Information Can Impact Decision-Making?
• Mental Accounting – How to Juggle Customers’ Mental Budgets?
• Valuation and Devaluation Effects for Sales.
• Value of Variety and Choice Overload in Customer Psychology.

In this article, you’ll find a short summary of the key points to remember if you want to apply these psychological tricks to your promotional strategy.

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The dos and don’ts of promotion marketing psychology

To warm you up before diving deep into the specifics, let's see a quick list of ten DOs and DON'Ts of promotion marketing and coupon discounts:

1. Make your customers feel good

The psychological key to success of ecommerce promotions and discounts is to make your customers happy. By offering them good deals, you boost their sense of achievement and progress. This way, you encourage them to buy more – and more often. But there is more to that than just deals. You can also improve your customers’ wellbeing by giving them an opportunity do to donate to a good cause or charity through shopping with you. Through all these little boosts, you give them a positive vibe and a sense of agency. That enhances their loyalty to your brand and drives your sales in result.

Take a look how the Hand In Hand cosmetics brand creates a positive vibe helping the customers to do the good thing:

2. Explain why

Offering products at a discounted price for no obvious reason may evoke suspicion among customers. Is the product broken? Is the expiry date coming soon? To avoid fishiness, state clearly why you are offering a discount  – maybe you opened a new store or there is a holiday closing in? You’ll figure something out for sure.

3. Use price anchoring

The most direct way to influence perceptions of a transaction is to use reference prices. Whenever a product is discounted, make sure customers can see what the price was before it was slashed. Don’t just tell them, “It’s X% off!” By showing the previous price, you build a price anchor to compare with the new discounted price and create a cognitive bias that encourages customers to complete a purchase.

4. Use the rule of 100

Most customers do not calculate the actual value of the discount – instead, they go for their gut feeling. It’s a standard practice in discount marketing to offer percentage discounts for prices under 100, and absolute amount discounts for prices over 100.

5. Pay attention to numbers

Studies have shown that customers perceive the difference between 4.97–3.96 to be smaller than the difference between 5.00–4.00. This indicates that you should use rounded values to make your discount stand out. On the other hand, it is commonly known that prices ending in .99 have the power to win over customers because they seem to be lower than they really are. This phenomenon is called charm pricing. So, if you need to sell a product without a discount, consider dropping off this little cent to make the price look more appealing.

Here’s a C&A example that neatly combines the rule of 100 and charm pricing:

6. Use contextual messaging

Wording offers in a contextual way affects how they are perceived. For example, “Get $X off” puts the focus on what the customer can gain, whereas “Save $X” puts the focus on the loss the customer can avoid. A/B test different approaches to see which method resonates better with your audience.

7. Give gifts

Everyone loves gifts. By giving presents to your customers, you win their trust and build an emotional connection. This doesn’t need to be anything pricey: a coupon code to welcome a new customer or newsletter subscriber, a freebie such as a free sample or free return option, or a well-crafted BOGO campaign. Anything works, as longs as it creates a positive mental response from your buyers.

8. Don’t forget that luxury doesn’t like discounts

If your brand strives for top quality and exclusivity, steer away from straightforward discounting. Discounts force your consumers to pay more attention to the price and not to the product, which may create a less luxurious image of your brand. You will be better off with VIP-only special offers or an invitation-based loyalty program.

9. Don’t let them miss out

Ever heard of FOMO? FOMO stands for the “fear of missing out”. The idea behind this piece of customer psychology is pretty clear – people don't like to miss out on great things, be it a memorable experience or a generous sale. You can take advantage of FOMO by launching time-limited flash sales or running product promotions on low-stock or limited-inventory products. Create a sense of urgency and scarcity to induce on-the-fence customers to complete a pending purchase.

10. Don’t go too far

Remember that going over the top with basically anything isn’t a good idea. If you apply all the cognitive tricks at once to get your customers to use your sales and discounts, you may end up compromising your brand image and value, not to mention going far beyond your budget margins. You don’t want your brand to be associated only with easy discounts and cheap deals, as it may position your company as a mediocre-quality and low-rate business.

8 promotion and discount psychology tricks you need to know and use

The list below presents sure ways of getting the best out of your customer base as well as attracting new shoppers. Make sure you diversify and adapt your strategies to match new and existing customers, based on their intentions, habits, and requirements. Here’s how you can use the power of promotions psychology to benefit your business.

1. The magic of free shipping

In 2004, Professor David Bell showed in his study that the cost of delivery and additional handling costs that appear in the first step of finalizing the order cause as much as 52% of cart abandonment. For modern retailers and DTC brands, free delivery is standard for orders exceeding the agreed order. Of course, the delivery is not completely "free," and its cost is usually included in the price of the product, or, in the case of larger orders, it’s simply treated as a discount applied to the order.

Customers love the word FREE more than you expect. The more you can claim something is a freebie, the more motivated your customers will be to get it. Free delivery is an additional incentive for customers who are more likely to buy something else just to exceed the order threshold to attain it. Then, customers feel that instead of paying for the shipment, they will pay as much when buying another product and therefore save money in the process.

The price threshold for free shipping not only protects your store from overcharging shipping costs but it’s also a way of motivating customers to buy more products through bundling.

Learn more: What makes free shipping promotions work?‍

2. The Endowment Effect

As customers value things more when they feel they own them, you can offer them a sense of ownership over coupons and sales promotions to increase engagement and, consequently, sales.

How to do that? One way to give customers a sense of ownership over promotions is to offer them a coupon that behaves or feels more like a savings card or a digital wallet. For example, you can offer a free amount to spend in your store to new customers – they’re bound to spend more than offered but will be satisfied to use the initial amount as they please.

Gift cards do the trick, too, as they feel more permanent than a random coupon code. The way you phrase your promotions also matters. To double down on this ecommerce promotion psychology trick, try to use phrases like “Here’s your 25$” or “We’ve added 10$ to your card.”

3. The power of product comparisons

Another interesting promotion psychology example is the Decoy Effect. This effect occurs when customers opt for the third option (the decoy) when faced with two other choices. For example, if you have an expensive product A with all features and a product C that’s cheaper but missing in functionality, the purchase of the product B, which is reasonably priced and offers an essential functionality, will be considered a bargain.

The Decoy Effect highlights the fact that you need to be aware of what product options you put in front of your customers (and how you do it). This means you need to consider how customers will make trade-offs between products, and whether you already have items acting as decoys. ‍

Here’s a simple example of the Decoy Effect in action at Amazon:

4. The Licensing Effect

Why does the sense of doing good make customers spend more? The Licensing Effect occurs when people are more likely to act in a morally bad way after doing something morally good. Doing a morally positive act boosts a person’s positive self-concept, which later on licenses the choice of a more self-indulgent end option.

This psychological effect can be successfully incorporated into your sales strategy by highlighting the good customers bring by purchasing your products or services. You simply need to give your customers a reason to feel moral (or morally superior) by shopping with you. Brands that have some form of social conscientiousness built into them should be sure to prominently display this fact: “By shopping with us, you are doing X good thing!”

5. The psychology of demographic affinity

Most businesses fail to utilize the full power behind incorporating demographic information into their marketing strategy. In most cases, the usage of demographic data revolves around which ads to show to which customer group. However, this data can be leveraged to do so much more. Customers who want to form a coherent identity and search for a sense of affinity will be more likely persuaded by identity marketing.

Demographic data allows you to construct similar appeals – “4 out of 5 men prefer X” or “2 out of 3 San Franciscans like Y” will be much more persuasive than simply targeting men from San Francisco with ads for X and Y. Instead of targeting demographic, you should focus your marketing efforts on targeting identities. For instance, you can address your audience’s age, location, gender, or profession.

You can rely on geofencing strategies here: with precise geotargeting and highly personalized customer experience, you will appeal to consumers in a more efficient way, addressing their sense of belonging.

6. Reference pricing and anchor pricing

Sales promotions and discounts are the key to boosting customer engagement and loyalty with your brand. Why is that the case? The answer is surprisingly simple – people love to get good deals, or at least, the feeling that comes with getting a deal. The Reference Pricing Effect is all about building this positive feeling that comes with finding a bargain.

One of the most direct ways to influence customer perception of what deal they are actually getting is by using reference prices, also called price anchors. The trick is simple – instead of presenting only the price that customers have to pay, make sure to include another product price that makes the first choice look like a good deal. This is why it is important to highlight the previous price if you’re offering new discounted prices.

Anchor pricing works great for product bundles, where you can highlight the deal a customer makes by buying a bundle of items instead of purchasing them individually. Always show two prices – the one before and after the discount. Then, your customers will feel they’ve made a good bargain and their satisfaction and engagement will grow.

You can also approach price anchoring by presenting a high-priced products on your store’s homepage. When your customers proceed to look at other products at a bit lower prices, they’ll consider them cheap and will be more willing to pay for them.

7. The foot-in-the-door technique

The next noteworthy discount psychology example is the foot-in-the-door effect. It occurs when customers have done something small for you, which leads them to be more willing to do something bigger later on.

This psychological trick is a well-known and widely used tactic in everything from auto sales to telemarketing. However, using it in an online context poses some unique challenges. There are a lot of factors that can drive the foot-in-the-door effect depending on the context, but at its core lie commitment and consistency. When it’s time to make the second decision (e.g. to purchase something online), the fact that your customer has already committed (even in a costless way) to the first action makes them feel a need to be consistent with that commitment.

How can you use this effect in sales promotions?

For example, as a cosmetics brand, you can hand out free product samples to customers outside your stores. After accepting these free samples, customers will be more likely to enter your store to buy other products. In the digital sphere, however, the most popular way of putting this effect into practice are signup forms and offers. For instance, ride sharing apps give free minutes for new customers. Many customers would never try the product or service without this initial incentive.

Because past behavior is such a strong first step for the foot-in-the-door effect, anything that draws the customers’ attention to relevant past actions has the potential to open the metaphorical door. One of the most obvious implications for your marketing strategy is that reminding returning customers of their previous purchases can be very powerful.

This is how Zalando uses this piece of customer psychology in practice:

8. The psychology of shopping momentum

Have you noticed that regular customers tend to spend more than new ones? The shopping effect describes a phenomenon when consumers who choose to make a purchase are subsequently much more likely to make another, unrelated purchase. In one experiment, participants first chose whether or not to buy a light bulb, and then chose whether or not to buy a keychain. If they did not buy the light bulb, there was a 31% chance that they would choose to buy the keychain, but if they did buy the light bulb, then the likelihood of them buying the keychain more than doubled to 67%!

How to apply the psychology of shopping momentum in your promotional strategy?

It can be applied at two different levels. The first strategy is to apply the shopping momentum simply as an effect of buying something. Deals, promotions, or strongly tempting loss-leaders can serve as ways to get customers to buy something, which in turn will make them more likely to buy something else.

The second strategy is to play with the underlying cause of the shopping momentum – the implementation mindset. One way might be to highlight the steps needed to purchase a product in the space where customers might normally expect to see product information. By putting this implementation information front-and-center, your customers will be more likely to start thinking in these terms. Any wording that encourages your customers to think about how they can – rather than should – buy your product will make them more inclined to do so.

This is how Amazon achieves this effect with the 1-click purchase option:

Apply promotions psychology in practice

The best promotional strategies aren't about mindlessly slashing prices. Sales-driving promotions and discounts are based on how customers perceive prices, brands, products, and what they expect from you specifically. By combining sales promotions psychology with attractive incentives in a smart and strategic way, you are setting yourself up for success. If you don’t make an impact on your customers’ decision making process, you might be missing out on a sizeable chunk of revenue.

To plan and build effective promotion and discount programs that employ the above-mentioned psychological tricks and techniques, a tool that allows the creation of detailed and multileveled campaigns based on precise audience targeting is just what you need. With the Voucherify promotion engine, you are able to design, create, publish, and track your campaigns, making the best use of the psychological marketing tactics.

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