In a recently published paper in the Journal of Marketing, a team of researchers led by Akshay Rao from the University of Minnesota found that a significant number of customers preferred getting a bonus quantity of a product than a discount on its price, even though the actual value received was slightly better with the discount.
The culprit? The customer’s poor math skills, specifically as it relates to Base Value Neglect.
For example, if a customer wants to purchase 3 tubes of toothpaste that are being offered as a promotion, the retailer may offer it as either:
- Buy 2 tubes of toothpaste, and get one free. (a bonus of 50% more); or
- Buy 3 tubes of toothpaste, and receive 33% off the total price
In both cases the customer receives 3 tubes of toothpaste, but most customers will perceive the first offer as more valuable because of the higher percentage number WHILE IGNORING the fact that the two calculations are using different base values (2 vs. 3)
Using this knowledge, the researchers were able to sell 73% MORE hand lotion by positioning it as a BONUS, rather than the alternative offer of a discount.
The researchers conducted several additional experiments, and came to the following overall observations. Bonuses had a strong, but not universal, preference. Depending on the frequency of purchase, familiarity with the product, or high vs. low price points, different customers will have different inclinations as to whether they are more motivated by a discount or an economically equivalent bonus. Beyond this, the “cognitive complexity of computation” often befuddles customers to the point where a majority prefer the double price discount of “25% off plus an additional 20% off” over the economically equivalent single discount of 40% off.
The lesson for marketers? Experiment with different bonus and discount promotion tactics. What may be mathematically equivalent could actually lead to you selling 73% more.
photo credit: www.flickr.com, najeebkhan2009