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Christmas is the time when we give. For this reason, I have an
interesting article on 'Gifts versus Price Discounts as a means to encourage sales' by Marlene
Jensen who is
preparing her doctoral dissertation on pricing.
The second item of the newsletter is also about pricing: the trend of online
micro-payments of less than $5. Could you do with another stream of revenue for
your business?
Let's give us a well-deceived extended Christmas
break and get ready for a highly successful 2006. So, the next newsletter will
be in February only.
Merry Christmas and Happy New Year to you, your family
and Staff.
Henriette
Pricing Strategy: Gifts versus Discounts
by Marlene Jensen
I just uncovered a very interesting piece of research from Sinha & Smith that
ran in the journal of Psychology & Marketing in March 2000.They were looking at
consumer responses to what marketing academics call 'transaction value'.
Transaction value is whatever is driving the consumer's perception of value at
the moment of purchase.
A discount will increase the consumer's perception of
value, as will added bonuses.
So... which is better? There is a clear winner!
The psychological basis for what consumers are thinking as they see your
offering(s) is 'prospect theory'. One of the most interesting aspects of this
theory is that people are more sensitive to losses than to gains. That means
while they love extra gains (bonuses, better quality, a price
discount, etc.), they don't love them as much as they HATE additional losses.
An easy way to see this in action is to look at a business that charges extra
for the customer to use his/her credit card. Even if it is only 2%, customers
absolutely hate this. Now picture this same customer coming to the cash register
and being told that as a special today, they
get 2% discounted from their purchases. Will they be jumping up and down in
elation? Calling everyone they know to rave at their happiness?
No. Instead, they are likely to smile and say, 'That's great!' and mean it. But
it won't make their day.
What's the answer for this business? Increase all prices by 2% and give everyone
who pays cash a 2% cash discount. This way the person
using a credit card pays the 'normal' price, so there's no reason to blow a
fuse. And everyone else gets a nice little discount.
So what does this mean when it comes to cash discounts vs. bonus gifts?
Consumers close to making a purchase do a mental accounting of what their gains
and losses would be from the purchase. The price
is in the loss column and the product/service is a gain.
But... consumers treat bonus gifts or price discounts differently in customers'
minds as a reduced loss. They lump your price discount
into the overall cost of the product/service. Yes, it reduces the perceived
loss, but once it's lumped into the price -- it disappears.
Now the price is just a lower loss -- but still a loss.
Bonus gifts are always framed in a consumer's mind as a gain.
So here's how the scale then looks:
- Loss (price)
- Gain (product/service)
- Extra gain (bonus/gift)
If you get more sales by offering a discount than a bonus/gift, you are probably
not using the best bonus/gift for your market. Try testing several different
ones. You can probably cut your discount
AND increase unit sales all at the same time -- with the right bonus.
And you know what a rocket lift that would give your profits!
© 2005 Marlene Jensen
Marlene Jensen is a pricing strategist. If you are looking at
pricing strategies you will really enjoy her
Pricing
Psychology Report (read
my
ebook review ). Her new ebook
46 Ways to Raise Prices-without losing sales has just be released
but sorry I have not reviewed it yet.
Proliferation of online micro-payments
eMarketer reports that Ipsos-Insight and Peppercoin
(a payments technology company) found that 45 million Americans were happy to make online purchases of $5 or less using
their credit or debit card. This represents an increase of 23% over last year.
Micro-payments received a boost with the popularity of digital music
services. This trend has progressed. The survey reveals that 10% of the respondents have spent $2 or less for an online purchase from
at least 6 websites.
Food for thought: Are we dismissing small-ticket items that could add another
source of revenue?
(Survey random sample: 1,115 US consumers)
Feedback and suggestions
are most welcome. Send to
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