The psychology of discounting: Something doesn't add up | Hacker News Reader

The psychology of discounting: Something doesn't add up

economist.com

25 pointsColinWright19 comments

Looooong time ago when I was young, I used to manage a fancy restaurant for a top chef.

There were instances when we did stuff the wrong way and needed to apologize to a customer. Some of the best way to apologize to a customer is giving something for free, show him some appreciation for his business and acknowledge that you made a mistake.

I remember that once we gave 10% off his bill and after that customer walked away, the chef came to me and explained the wonder of discounts and free dishes.

Basically the lesson was that the customer would have most likely walked away from the restaurant happier had he received a free dessert rather than getting a 10% discount.

Another thought that struck me is that the food cost of that free dessert was less in value than the 10% off - even though the customer cost of that dessert had the same value of the 10% off.

I'm glad I learned that lesson long time ago, today when I want to entice someone to make a sale I always prefer giving something away for free rather than giving a discount. That way I get a happy customer and I don't reduce my gross sales.

The other difference is that people often skip the dessert entirely - it's a pure indulgence. By giving them a "free" dessert, you're not only hitting the "free is always good!" part of their brain, but you're giving them an indulgent experience they probably would not have had otherwise. So then not only are they not mad about whatever the messup was, they may even be grateful.

The other twist to this of course is when people are spending other people's money or when they are being treated. Each situation is different. An offer to take 10% a check if it is on an expense account is not the same as giving something to someone that is a bonus to them personally. I guess the best way to illustrate this would be with a hotel. Upgrading someone to a better room (at the same price) benefits them personally. Discounting the bill in that case generally would not be the same benefit or cause the same happiness to them.

I know that Whole Foods employs these kinds of tactics all the time. As an anecdote, a few weeks ago I went there to buy some sunflowers for my girlfriend and was happy to see them marked at "2 for $10." When I went to pay, the cashier said, "Ah, so the price of these went up!" I asked her what she meant, thinking it odd since they were on supposedly on sale. She told me they were $4 the previous week, must've been they were getting popular.

So what they did was mask the price hike with the veneer of a promotion, which is equal parts clever and cruel. Here are a couple of photos of other pricing tricks they've played:

1) http://cl.ly/image/102k133G2L3B 2) http://cl.ly/image/3a1q002M1G05

The moral of this story is that the markets are inefficient, and the whole religion we've built around the theory of efficient markets is a false one.

The free market concept does work, but the problem is that it's reliant on an informed consumer. Marketers and the like try their best to shift that balance of power away - and they're very good at their job.

If you can't (or won't) make accurate value judgements on products, you'll lose every time. The house has the advantage, as it were.

I didn't see the free market concept doesn't work. I said the efficient markets assumption is invalid. If you assume a rational actor you can make certain strong statements about the free market's ability to reach efficient equilibrium on its own. That's where the neigh-religious "if we just leave it be, the invisible hand will guide the market" talk comes from. Once we abandon the idea that people behave rationally, and the behavioral economics research we've seen over the last couple of decades forces us to abandon that idea, we can no longer make such strong statements. The "invisible hand" is leading us somewhere, but it's not necessarily to an efficient or even a stable equilibrium. We're forced into the morass of having to justify policy on its own merits, instead of invoking the religion of efficient markets.

I disagree with the sense that because a customer prefers a free dessert over a discount of greater nominal value, it is somehow inefficient.

Why does the customer visit the restaurant in the first place? To maximize efficiency? And this irrational act of a dessert makes it inefficient?

People value things in different ways, it's really a complex equation and you are over simplifying it. Maybe the experience of getting a free dessert is more valuable than saving the cash. It is a service business after all.

Free markets aren't always easy to understand, but they always give people more of what they want in aggregate than any mechanism of force.

> People value things in different ways, it's really a complex equation and you are over simplifying it.

I'm not the one oversimplifying it.

Similarly, the concept of democracy does work, but the problem is that it's reliant on an educated citizenry, which is unfortunately fading fast in the US.

"a 50% increase in quantity is the same as a 33% discount in price"

Even when the per unit price is equivalent, the quantity purchased is important. In the case of perishables, I'd probably err on the side of a small quantity at a reduced price. I can't drink a whole gallon of milk before it goes bad, so what good would 50% more be? In the case of nearly every other consumable, I'd prefer 50% more because it means a longer period before I have to restock, if I'm careful.

> "In the case of nearly every other consumable, I'd prefer 50% more because it means a longer period before I have to restock, if I'm careful."

Surely if the price works out the same per unit, it's always better to have the discount than the quantity increase. If you prefer to get more so you don't need to restock then great, you can buy more of it at the same time and the cheaper price means it's just like they offered you a quantity increase instead. On the other hand, if they offer you a quantity increase and you don't want that much... doesn't help you.

For example the shell garage across the road from my office nearly always has an offer of "2 bottles of coke for £x" - if I'm buying a drink there, it's because I'm thirsty at this point in time and don't have anything in my office fridge, and quite likely I'm about to be walking somewhere, buying two doesn't help me, even if there's a good chance I'll want a second one the next day.

OK, I stand corrected. I suppose there are some edge cases where this wouldn't hold (limited availability, implications of packaging size etc.), but you're right. If there's no other difference between the two, the discount is always better.

Yeah, I think they should have used "equivalent" instead of "the same". "The same" has a stronger connotation and won't click with some people.

Previous thread about the same research

http://news.ycombinator.com/item?id=4207134

Thanks, interesting discussion.

As it happens I came across this independently and thought I'd seen it here, but posted in order to let the duplicate detector do its thing. It didn't find the other, because it is in fact from Time, and it's just quoting an paraphrasing this (more) original source. The real, real original is here:

http://www.journals.marketingpower.com/doi/abs/10.1509/jm.10...

Behind a paywall.

This is the reason that almost all infomercials always throw in something free, regardless of what the product is. "Order now, and we'll throw in this convenient travel size, absolutely free!"

The other reasons they do that is because it gets people who are on the fence to take action. Along the same lines they also do "if you order now we will give you two" and other things added in addition to whatever the original offer is.

I would say I'm not bad with math, being a physics student, but I have to admit I had to stop and think about 50% more and 33% off being equivalent. 50% more gives you 3/2 of a product, giving you a price per unit of 2/3 the original price, or 33% off.

Something is wrong with how we teach fractions, and it can be used to deceive people.

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