Promotions and incentives

Art and science

Promotions and incentives

There are many reasons why our faces light up when presented with a good bargain. As humans we naturally seek to avoid losses, so customers are strongly attracted to promotions or discounts which allow them to ‘get more for less’. Also, seeing a discount or bargain price makes the consumer feel they have control of the final price of the product, which empowers them and provides them with the confidence needed to make a purchase.

However, research has shown that this high level of excitement at finding a bargain interferes with consumers’ ability to make a rational judgment about the offer, which is why promotions possess the power to ‘trick’ consumers into certain purchases. Indeed, as a shopper you may be familiar with the scenario of arriving home with a bag of bizarre items that weren’t even on your shopping list.

The science behind promotions

Psychological research in this field has examined the science behind promotions and provides valuable insights when it comes to executing these strategies. Firstly, there’s such a thing as a deal that is too good. Research has found that discounts must be large enough to get noticed and act as an incentive, but not so big that they are viewed as suspicious and subsequently rejected.

This is particularly applicable to luxury goods. One study by German neuro-economist Plassmann even found that participants rated the same wine as more desirable when they were told it had a higher price, as price was used as a symbol of value. Therefore, retailers must be careful to ensure that their discounts are appropriate for the item that they are applied to, as discounts can indicate lower perceived value.

Another fact that must be considered when implementing offers is that consumers have a limited capacity to process information. In fact, based on early psychological research, psychologists have estimated that we can only consciously process 0.0004% of incoming sensory information from the environment. Hence it is worth ensuring that offers and promotions are personally tailored to the individual where possible, in order to attract attention. Research has shown that personalised offers, such as named emails, lead to higher engagement and increase the likelihood of purchase. 

Losses over gains

When it comes to a 20% discount versus a free product or trial, research has shown there are differences in the ways in which monetary and non-monetary promotions are perceived. Consumers are likely to view non-monetary promotions as a gain, whereas a monetary offer is seen as a reduced loss due to its comparison to the reference point (the original price). As mentioned above, humans place more value on losses than gains, so overall monetary promotions would appear to be more effective.

However, research has also shown that consumers view non-monetary promotions as direct rewards, which conditions them to make further purchases due to subsequently associating the product with a positive outcome (receiving a free product). Providing a reward in the form of a non-monetary promotion was found to be particularly relevant to younger people, who are more attracted by immediate reward and have less experience with money.

A further finding related to these two promotion categories is that monetary promotions are more effective for utilitarian products, whereas non-monetary promotions are more effective for hedonic products, purchased purely for enjoyment. Also, when a new product is introduced to the market, sales are likely to benefit from an extra free product promotion rather than an introductory low price.

This can be explained by reference pricing, as a consumer is unlikely to want to purchase the same item for a higher price in the future, when they know that the new price is far higher than the original low reference price. 

Presenting an offer

While it’s vital to bear these factors in mind when designing promotions, the way in which offers are presented to consumers is just as important. For instance, colour has a role to play in influencing our behaviour; simply using red on signs could trigger transactions, due to its association with a sale or discount. Other colours work differently; one Oxford University study found that people thought they were saving twice as much as when the cost was shown in black and white.

Nevertheless, bombarding consumers with promotional signs will simply reduce each sign’s ability to engage people. It’s been found more effective to just have a few large signs, as size matters when it comes to attracting consumer attention.

Another thing shops must realise is that signs and promotions need to be refreshed regularly in order to maintain their influence over consumers. As such, promotions should occur in line with established sale periods such as ‘January sales’. The ubiquitous permanent sale signs seen in the windows of many furniture stores simply cease to excite or generate purchases.

Many promotions work on the principle of scarcity, which is the high value that humans place on items which are perceived as scarce. This is why it’s necessary to regularly update signs in order to maintain the sense that the deals on offer won’t last forever.

Know your audience

Once again, there are variations when it comes to the demographics that signs are targeting. Younger people have been found to favour creative and complex graphics, while their older counterparts prefer simplistic designs that are easy to comprehend. So depending on the product, different signs can be more appropriate to different target audiences. For example, products bought by younger people such as body piercings and yoga pants, may benefit from adverts with more complex designs. Also, the new phenomenon of digital signage in shops is thought to be particularly effective on younger people, and perceived as more useful by men. As such, consider using these signs if your target market fits this demographic.

To conclude, promotions have the most impact when they are intelligently tailored to both the customer and the product, and when the role of promotional signs is carefully considered.  Retailers may benefit from using signs that reflect the audience they are targeting; through graphics, and the medium used. They should also keep promotions infrequent, to encourage notions of scarcity which will encourage consumers to buy.