What science says about discounts versus promotions

Companies that understand the psychology behind special offers create a favorable brand image, deliver happiness to new and returning customers, and boost long-term profitability and sales.

In 1887, Coca-Cola distributed the first-ever coupon. Little did the company realize how important the concept would be in shaping the future of commerce.

With the Coca-Cola voucher, recipients could redeem one free glass of Coke at any dispensary. Coke, which was introduced a year earlier, benefitted from this marketing strategy as it encouraged both consumer and vendor adoption. Families would visit their local pharmacies to get their free Coke and give it a try. In turn, pharmacy owners would tap Coca-Cola to replenish their supply as demand grew. The coupons worked, and it was just the beginning of something much bigger.

According to Coupon Sherpa, “Between 1894 and 1913, an estimated one-in-nine Americans had received a free Coca-Cola, for a total of 8,500,000 free drinks. By 1895, Coca-Cola was being served in every state.” Coke had solidified its brand as a household name. Today, Coke is the world’s best selling carbonated beverage thanks to more than a century of clever marketing strategies including coupons, incentives and free offers.

Today, nearly every brand and retailer uses discounts or other promotions to grow their businesses too. Companies that understand the psychology behind special offers create a favorable brand image, deliver happiness to new and returning customers, and boost long-term profitability and sales.

Below are several studies that reveal how consumers react to discounts vs promotions and how strategic brand incentives and freebies can contribute to a company’s success.

Incentives create happiness

In 2012, a study led by Dr. Paul J. Zak, professor of Neuroeconomics at Claremont Graduate University, was commissioned to learn how incentives impact people’s happiness, health and stress. The study discovered that recipients who got a $10 voucher experienced a 38% rise in oxytocin levels and were 11% happier than those who did not receive a voucher. Furthermore, respiration rates dropped 32%, heart rates decreased by 5% and sweat levels were reportedly 20 times lower. Consequently, they felt more relaxed and less stressed.

Free offers influence purchases

A 2013 global survey by RetailMeNot, found that of its 10,009 participants, 51% agreed that they were influenced by deals, promotions and free offers when shopping online. In the U.S., 56% felt the same. Using free offers, retailers can encourage customers to:

  • Add specific items to their cart including excess inventory, higher-margin products or out-of-season goods
  • Discover new, related products to complement product launches
  • Spend above a specified minimum order total

Shoppers reciprocate samples

For an article in The Atlantic, associate editor Joe Pinsker explains, “People love free…. Retailers, too, have their own reasons to love sampling, from the financial (samples have boosted sales in some cases by as much as 2,000 percent) to the behavioral (they can sway people to habitually buy things that they never used to purchase).” Samples or free trial products are a major revenue driver both online and offline. Brands offer a risk-free proposition to consumers who can try something new, for free. Brands that manage to impress shoppers with samples earn consumer loyalty and trust and generate profitable sales due to our natural desire to reciprocate goodwill. Brands that give away free value start new customer relationships off on the right foot. Over time, the brand’s perceived “generosity” makes it more likeable which also leads to positive brand associations, which generates customer referrals and sales.

The price of free

According to academic and behavioral scientist Dan Ariely, zero is a special price. To many, it is worth a lot more than its face value. Almost irrationally, consumers “perceive the benefits associated with free products as higher” than their absolute value. In a paper for Marketing Science journal, Ariely found that, “People appear to act as if zero pricing of a good not only decreases its cost, but also adds to its benefits.” Therefore, brands who price items at a cost of zero or give things away for free offer special appeal to everyday customers. People value it more, which is why so many brands take advantage of the “free gift with purchase” tactic to increase average order totals among shoppers.

The power of free

Defying conventional logic, consumers are more drawn to free items more than they are to discounted products, even when the discount helps shoppers save more money or get more value from their purchase. In 2012, The Economist published a post titled, “Something doesn’t add up.” In it, the author explained that researchers from the Carlson School of Management at the University of Minnesota conducted an experiment to learn more about how consumers reacted to discounts and freebies. The conclusion was, “Shoppers… much prefer getting something extra free to getting something cheaper.” Sadly, the explanation for the behavior is less than flattering. “The main reason is that most people are useless at fractions.” As emotional creatures, people are more inclined to accept free offers than discounted ones. The results speak for themselves. “The researchers sold 73 percent more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount.” Whether they are right or not, shoppers believe they get a better deal when they walk away with something for free instead of spending less on their overall purchase.

Final thoughts

Ultimately, the best deal, promotion and freebie strategies help you:

  • Avoid bargain hunters who may overuse your customer service resources and never convert into loyal, returning customers.
  • Preserve your brand’s integrity by limiting the number of coupons customers can use and steering clear of deep discounts.
  • Encourage new product trials, repeat purchases and higher average order totals through incentives that motivate buyers to add more items to their cart and to complete their order.

Bottom Line 

In 1887, Coca-Cola didn’t discount their brand by introducing coupons. Instead, Coke promoted their brand by sharing one free Coke and delivering happiness to recipients while creating a favorable brand image and becoming the world’s best selling carbonated drink. Companies that understand the psychology behind special offers create a favorable brand image, deliver happiness to new and returning customers, and boost long-term profitability and sales. Don’t discount your brand, promote your brand while rewarding your customers, delivering happiness and creating a favorable brand image!