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The Science of Discounts
Using Consumer Psychology to Ditch Discount Dependency
In 1888, Coca-Cola issued what’s believed to be the first coupon ever, redeemable for a free glass of Coke.
Nearly 150 years later, discounts haven’t gone anywhere. In fact, they’ve become a defining feature of our data-driven, hyper-competitive ecommerce landscape.
All those merchants aren’t just lowering their prices for fun. Discounting plays on powerful psychological principles, making it a highly effective way to incentivize consumer behaviors.
But at the same time, discounting is a risky strategy that comes with serious downsides. Reducing margins isn’t something to take lightly — especially amid historic inflation and other rising costs for retailers.
Overusing discounts can create a state of ‘discount dependency,’ where consumers are hesitant to buy anything without one. Retailers who lean too heavily on this strategy may find it difficult to get shoppers back to their regular prices.
But it doesn’t have to be that way! Used carefully in combination with other rewards and incentives, discounts are a valuable tool for nearly any ecommerce business.
All it takes is a little creativity, some thoughtful planning, and an understanding of basic psychology.
With this guide, we’re here to walk you through it. We’ll use consumer psychology to explain:
- Why discounts are so effective
- How they can damage your business if overused
- Helpful and harmful ways to use discounts
- Other ways to reward and incentivize your customers
- How you can build a sustainable strategy for finding and keeping customers — that includes the responsible use of discounts!
Table of Contents
Psych 101: Scarcity and urgency
Psych 101: Saving money feels good
How ecommerce brands use discounts
Why discount dependency happens
The risks of discount dependency
Psych 101: Customer Perceived Value
Ways to incentivize customers sustainably
Donations — a powerful discount alternative
Psych 101: Valuation and Devaluation
Reward your customers with impact
Why discounting?
If you’ve shopped online, you’re used to getting discounts — they’re a core sales tactic for hundreds of thousands of retailers.
In the United States, 83% of online shoppers have used one, and in 2021, a staggering 92% of shoppers admitted to looking for deals before buying anything online.
The question isn’t so much how retailers are using discounts — it’s what aren’t they using them for?
Ecommerce businesses use discounts to promote all kinds of consumer behaviors, from adding to cart to sharing emails to finally clicking ‘buy.’
They do that for a very good reason — because it works.
In 2018, research from RetailMeNot found that:
- A discount could prompt 67% of consumers to buy something they hadn’t planned on purchasing
- A discount could convince 80% of consumers to try out an unfamiliar brand
But the flip side is that when discounts are everywhere, they become an expected part of the shopping experience. It’s not so much that discounts lose their power — people still love saving money!
Rather, it’s that repeated exposure to discounts makes customers reluctant to buy without one.
The same research from RetailMeNot found that:
- Nearly half of respondents would avoid a brand that didn’t offer discounts
- 70% of millennial shoppers won’t buy anything without first searching for a deal
How discounts work
It seems obvious that discounts would be so effective. Who doesn’t like saving money?
But it’s deeper than that. As we’ll explain in this guide, discounts tap into some powerful psychological principles — in both positive and negative ways.
Understanding these consumer psychology basics is key to building a sustainable discount strategy that supports your brand and products, instead of devaluing them, in the long run.
Psych 101: Scarcity and urgency
Discounted items don’t stay that way forever. Otherwise, the sale price would be their regular price!
When consumers see that a lower price won’t last forever, it creates a sense of urgency — giving shoppers a reason to buy now, instead of later.
This is another reason brands often used sales to clean out the last of their inventory. In addition to a limited time offer, the products themselves are limited. If buyers don’t act now, they’ll miss their chance forever.
Psych 101: Saving money feels good
Getting a great deal also just makes people happy. That’s backed up by science! Multiple studies have shown us that when we get a discount, it gives us all kinds of good feelings like happiness, excitement, and pride.
On the other hand, missing out on a discount can bring up negative feelings like regret and jealousy.
While this might sound obvious, the effect isn’t entirely logical. Imagine this scenario — you decide to skip the purchase entirely, and instead deposit the money in your savings account.
Would saving the entire purchase price give you the same kind of rush?
How ecommerce brands use discounts
Perhaps the better question would be — how don’t they?
Discounts are such an effective way to incentivize consumer behavior that brands happily use them at nearly every stage of the sales funnel, from first purchase to abandoned cart.
Discounts are typically offered to consumers in 2 ways: on-site discounts, and through third parties, primarily as affiliate links.
On-site discounts include:
- First purchase discounts
- Holiday and Black Friday deals
- Signing up for marketing email or SMS for a discount
- Re-engaging lapsed customers
- Returning to an abandoned cart
Third party affiliate discounts include:
- Affiliate links shared by influencers
- Coupon sites like Retail Me Not
- Recommendation sites like Wirecutter
Ecommerce brands get real value from using discounts in this way — but it comes at a real price. Next, we’ll explain discount dependency, and how it holds online retailers back from reaching their goals.
Discount Dependency
Imagine your friend gave you a thoughtful, high-quality birthday present. You’d probably be surprised, grateful, and thrilled!
But what if every time you saw that same friend, they had a present for you? It wouldn’t take too long before you considered that normal — or started to question their motives.
If you saw your friend and they didn’t have a present, you might wonder if you’d done something wrong. Or, you might start to ask why they were so eager to give these items away. Could it be that they’re just trying to get rid of clutter? Are the gifts damaged or low in quality?
That’s what happens when brands lean too hard on discounts, especially early in the customer journey. It becomes difficult to close any sales without a discount, because the customer is conditioned to expect a lower price.
That’s what we call discount dependency — and there’s a psychological reason why it happens.
Psych 101: Anchoring
Anchoring is well-documented cognitive bias, with powerful applications in marketing and consumer psychology.
It states that the first sticker price customers see becomes the standard — or anchor — that they measure all subsequent prices against.
Brands can use anchoring to their advantage, such as by displaying higher-priced goods first. But it’s also one of the underlying reasons why discount dependency can become such a problem.
Really, this shouldn’t be surprising. If your customer gets a discount, or is offered one, during their first few interactions with the brand, it’s teaching them that lower price is normal.
Why shouldn’t they be hesitant to pay a higher price later, even though the product hasn’t changed?
Why discount dependency happens
Why would any brand anchor their customers at too low a price point, enter a state of discount dependency, and knowingly devalue their products?
The answer is that it’s more competitive — and more expensive — than ever to get potential customers visiting your online store.
Getting customers is more expensive than ever
The online landscape is becoming more and more competitive.
While the percentage of sales happening online continues to grow, so too does the number of merchants. Additionally, giants like Walmart and Amazon dominate many niches, offering choice and convenience that are completely out of reach for smaller brands.
Additionally, it’s become more difficult to personalize and target social ads effectively, largely due to privacy and tracking updates made by Apple to their iOS operating system.
The result? Website traffic is much more expensive per visitor.
Capturing and converting at any cost
Because of that increased customer acquisition cost, brands are willing to do everything in their power to convert — and the most obvious answer is offering discounts.
Once they’ve got eyes on their products, brands are intent on closing sales — or at least capturing emails and phone numbers, to stay in contact with potential leads.
In extreme cases, discount dependency can lead to offering customers multiple, stacked discounts, such as 10% off their first purchase, and another $5 off for signing up for SMS.
Put yourself in the customer’s shoes. After being offered multiple discounts right out of the gate, how could they ever get comfortable with paying the regular price?
The risks of discount dependency
Discounts do have value, and if used wisely they can absolutely help brands in the short term.
But becoming discount dependent is a harmful, self-perpetuating cycle. Here are some of the ways overusing discounts can damage online businesses’ long-term prospects and profitability.
Eroding margins
The most obvious problem with discount dependency is that it eats into retailers’ profits. While an occasional 10-20% off isn’t a problem for most online stores, if discounts become the default on nearly every purchase, they can quickly destroy profitability.
This is an especially relevant concern in light of the rising customer acquisition costs described above, and soaring inventory prices due to global material shortages and supply chain disruption.
Weakening brand identity and value
If products are always on sale, consumers come to believe that lower price must be what the products are worth.
As we explained, this is related to anchoring. But there’s another psychological principle at play, too — customer perceived value. By extension, customers may consider your brand itself to be lower-value, or even lower quality. While bargain-bin branding can work for some companies, it’s generally undesirable, especially if you’re selling higher-end or luxury products.
Psych 101: Customer Perceived Value
In consumer psychology, it’s not what your products are objectively worth that matters. It’s the value shoppers believe they can provide, in comparison with what they cost.
Sometimes, discounts can improve perceived value. For example, if customers already believe your product is high quality, a lower price certainly means better value for money. But if overused they can also damage perceived value long term.
For example, you might be selling the most effective pair of scissors on the market, that stay sharp for 10,000 years and effortlessly slice through even the thickest cardboard.
But it’s up to marketers to communicate that information effectively. If that pair of scissors was always 50% off, would you think it was the best on the market?
Lowering customer lifetime value
Every shopper loves a good deal. But a heavy emphasis on sales can attract those who just want a deal, instead of customers who are genuinely excited about your product.
Brands should be striving to build long term relationships with their target audience, not become a bargain bin for discount hunters.
At its worst, discount dependency can actually lower the value of potentially loyal customers, making them overly price-sensitive and unlikely to buy without a discount.
Instead, focus on nurturing these strong customer relationships over time, rather than leaning on discounts to create a flurry of short-term interest.
Examples of poor discount use
There are many great ways to use sales and discounts, as well as non-discount ways (like donations) to incentivize your customers.
We’ll cover some of those next — but it's perhaps even more common to overuse markdowns, and inadvertently damage your long-term strategy.
Here are a few kinds of discounts that we recommend most retailers avoid.
Incentivizing reviews
Good reviews are invaluable to online businesses. They act as a source of social proof, helping retailers build customer relationships and trust
But offering discounts in exchange for reviews can quickly create a harmful cycle. When customers realize they’ll be offered a discount if they review after buying, they’ll come to expect (and budget for) that discount again and again.
Product launches
Discounting a brand-new product — sometimes before it’s even available — is a perfect example of everything that’s wrong with over-discounting.
Product launches should be exciting! Ideally, customers should be interested and eager to shop before the product has even been unveiled.
Discounting new products destroys all that buzz and urgency. It anchors the customer to a lower price — before the regular cost has even been introduced! There are other ways to tap into urgency and scarcity, like limited product drops or presale releases.
First touchpoints
Making that first purchase, signing up for an email newsletter, or providing a phone number for SMS updates are incredibly high-value actions. These are the first steps in capturing traffic and converting it into a dedicated, loyal community.
That’s why so many brands are willing to offer discounts to make it happen. But just like discounting new products, offering discounts at these first touchpoints anchors shoppers to an unsustainably low price, devaluing both your product and brand identity long-term.
Pairing onsite and external discounts
Are affiliate links and coupons key to your marketing strategy? Then you’ll want to limit the discounts you offer on-site — and vice versa.
Doing so can lead to shoppers always searching the web for discount codes before making a purchase. If you haven’t taken steps to prevent it, shoppers might even apply multiple discount codes to one order.
Doubling down on discounts like this can lead to cannibalizing your margins, and paying out affiliates for sales they weren’t actually responsible for.
Discounting luxury products
There’s one class of products that should never, or rarely, be discounted. That’s high-end and luxury products, which rely heavily on perceived value.
There’s ample evidence that discounting luxury products can make them seem less exclusive and desirable to consumers.
While there may be some situations where discounting luxury makes sense, other forms of incentives — like personalized donations through Twio — are likely a better bet.
Ways to incentivize customers sustainably
There’s no reason to forego discounts entirely. Used carefully they’re a powerful tool that can, and should, be part of your strategy to attract and retain high-value customers.
Discounts are ideally used in combination with other types of rewards and incentives, like:
- Store credit
- Early access to new products
- Access to exclusive content
- Donations (more on that later)
Here are some tips for using discounts, and other incentives, in a way that supports, rather than hinders, your long term goals.
Subscribe and save
Offer your customers a discount (or other reward) when they sign up for automatic, recurring purchases.
It’s a proven model that benefits you and your customers. You get the assurance of future sales, and they get a steady supply of a product they love, hassle free. That’s a mutual convenience well worth paying for!
Re-engaging lapsed clients
This strategy is a great example of how powerful rewards can be when used later in the customer journey — after you’ve successfully set the item’s normal price as an anchor.
If a formerly active customer hasn’t shopped in a while, a discount (or donation) is the perfect way to get them active again. By offering them a measurable monetary value, you’re showing them you value their business, and want to revive an ongoing customer relationship.
Discounts for a reason
If a product is always on sale, the natural question is — why?
Prevent customers from asking what’s wrong with your product by always explaining why you’ve chosen to mark it down. Are you clearing out those last few items? Celebrating a holiday? Or do you just want to do something nice for a longtime shopper?
Loyalty programs
Loyalty programs are a perfect way to save discounts for high-value, returning customers who actually care about your brand.
Instead of throwing discounts out like candy, you’re using them as a reward for customers who’ve shown they’re more than willing to pay full price.
Other types of rewards are great here too, like donations, store credit, or early access to new products.
Gradually decreasing discounts
One science-backed way to tap into urgency is to start with a certain discount, then gradually reduce it over a set number of days. For example, a 5-day sale could start with products at 50% off, and end with a 10% discount.
This is an especially great tactic for holiday sales, as it allows you to ‘count down’ to the special day.
Donations — a powerful discount alternative
Donations aren’t the only way to take advantage of these strategies, and reward both new and returning customers.
Making donations to a cause they care about, especially with a tool like Twio, is an equally powerful incentive that doesn’t carry the same risks of discount dependency.
Incentives that strengthen your brand
In 2022, shopping isn’t just a financial transaction. Consumers want to support brands that share their values, and care about making the world a better place.
Increasingly, retailers are making social and environmental awareness part of their brand identity. Whether it’s by using recycled materials or launching social impact initiatives, companies want to show their communities who they are and what they stand for.
That’s why donating to worthy causes on your customers’ behalf can be such a powerful marketing technique.
Instead of marking down and devaluing products, you’re strengthening brand identity while building consumer trust. Every time shoppers see you donate, they’re watching you live by your values.
The psychology of donations
Just like discounting, this strategy offers customers a measurable monetary value. That makes it a uniquely effective alternative to discounting — without many of the risks and drawbacks.
Donating taps into many of the same psychological principles as offering discounts, like creating a sense of urgency and prompting positive emotions.
Nor does it come with the same risks, like anchoring customers too low and damaging your brand's perceived value.
But donating on your customers’ behalf lets you leverage two other psychological principles, too: the licensing effect, and the principle of subjective valuation.
Psych 101: Licensing effect
Think of licensing as the psychological equivalent of “treat yourself”!
Research shows that if customers feel that they’ve done something good, they’re less likely to hold back on a fun activity, like shopping. Offering donations can give your customers a chance to reaffirm their values, so they feel deserving of a splurge.
In practice, you could let customers know that if they shop today, $10 will be donated to conserving endangered wildlife in Indonesia. Because making a difference feels good, customers will be more ready to enjoy some shopping — and they might even spend more than they would have otherwise.
With Twio, it’s even easier to take advantage of this licensing effect. Because our donation flow is integrated right into the shopping and checkout process, doing good becomes a crucial part of your customers’ experience.
Psych 101: Valuation and Devaluation
Research shows us that customers find rewards more valuable if they’re aligned with their current goals. If you’re hungry and a brand offers you a burger, that might seem more appealing than $10 off your next purchase.
The valuation effect is relevant to donations because, if you have the ability to donate to a cause your customers care about, they’ll see that as higher in value. Depending on your target audience, it could even be higher value than saving money themselves.
For example, if your target audience cares very much about climate change, donating to reduce emissions will feel incredibly valuable. Depending on your audience, they might even prefer that reward to a discounted price!
With Twio, harnessing the valuation effect is easy. You can allow customers to choose a cause that’s important to them, or pre-set some choices that are relevant to your brand.
Reward your customers with impact
You can ditch discounts, boost sales, and show customers what you stand for.
With Twio, you reward your customers with impact when they take high-value actions like making a purchase, leaving a review, or signing up for your newsletter.
We believe that not only is it possible for ecommerce brands to be both profitable and socially responsible — it’s a prerequisite for tomorrow’s market leaders.
If you’re interested in a planet-positive marketing tool that will help you stand out from the competition, reach out today. We’ll set up a demo and show you exactly how our product works.
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