Gambol with Gambled Price Discounts

The trouble in giving deep discounts on items is that it devalues the items for when you return to normal pricing. With the ultimate deep discount—free—you may very well attract lots of takers, but those takers probably won’t fully appreciate what they’re getting. Researchers at Monash University in Australia find that consumers have an easier time recognizing the value of a big discount when charged even a token price than when getting it for free.
     Now researchers at Ruhr University Bochum and University of Stuttgart are proposing a method they believe will carry the draw of a deep discount without the danger of item devaluation. It works best in those circumstances where the shopper lacks sufficient information or attention to relate higher prices to higher quality. The researchers call their method Gambled Price Discounting (GPD): To receive the discount, the shopper must win at a game of chance. The “scratch-off ticket” promotions used by many retailers are a form of GPD.
     When you tell customers they’re receiving a price discount, they’ll build good will toward your store. If you add that the discount isn’t available to every other customer, the good will might be even greater. But do be aware that your announcement could make the customer uncomfortable. Loyal customers often believe they deserve better odds. Be consistent and ready to explain the reason for the discount. Otherwise, the customer can get angry, thinking that your store pricing is highly arbitrary or even discriminatory. For American consumers, make the reason demographic (“A 10% discount to senior citizens”) or marketing-determined (“A 10% discount to first-time purchasers”). With GPD, the reason becomes, “You won!”
     In the Ruhr/Stuttgart studies, which tracked shoppers’ behavior in actual retail stores over an extended period of time, GPD effectiveness didn’t depend on the shopper’s actual probability of winning. But other research indicates that the perceived probability of winning makes a difference. Consumers who feel they beat higher odds are more interested in using the discount.
     Even though the GPD tactic overcomes the devaluation effect of deep discounts, you’re still wise to keep the discounts in the range of 20% to 30%. The frequency with which the shopper sees low prices influences a store’s price image more than does the amounts by which prices are lower. The Ruhr/Stuttgart researchers found that the GPD effectiveness held up as well with modest as with high discount percentages.

For your profitability: Sell Well: What Really Moves Your Shoppers

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