Offer New Customers 15%-35% Discounts

One problem with attracting new customers by offering price discounts is that it establishes expectations of discounted prices on subsequent transactions. The bargain hunters might sign on with you for a first sale, but will sign off as soon as another good discount comes along elsewhere. Or if you do continue giving substantial discounts, your business profitability suffers.
     Researchers at Aalto University and Hanken School of Economics in Finland find this is much less likely to occur if the initial discount is between 15% and 35% than if it is outside this range. The reason for this has to do with the degree of attention the shopper devotes to analyzing the reason the retailer is offering the discount. When a discount’s very small, such as 5%, shoppers consider it too trivial to even analyze. When the discount is large, such as 70%, the shopper’s attention is directed toward determining if the item is of sufficient quality rather than whether the retailer will continue to offer value. Consequently, the extreme discounts fail to build customer retention as strongly as do the midlevel discounts. Digging into their research findings, the researchers recommend that, for purposes of customer retention and lifetime revenues, it is better to offer no introductory discount than to have one above 40%.
     Studies at Georgia State University and University of Leeds indicate that these types of effects are strongest with shoppers who have PTPK—pricing tactics persuasion knowledge. Such shoppers tend to carefully consider how retailers use pricing tactics to influence the consumer to buy, and so are more likely to become repeat customers when the midlevel introductory discount sets off that type of thinking.
     There’s another problem with introductory discounts, however: Customers who become regulars start wondering why they’re paying more than someone who hasn’t shown long-term loyalty to you. They might become tempted to stop giving you their business so they can then take advantage of the new user rate.
     One solution is to offer rewards to regular customers, such as with frequent shopper programs. Research findings from London Business School and Massachusetts Institute of Technology suggest another tactic: Tell new customers that the reason they’re getting a discount is to compensate for the hassle of changing habits and integrating the purchase into their lives. This justifies the discount in a way which makes the experienced user not begrudge the benefit given to succeeding generations.

For your success: Retailer’s Edge: Boost Profits Using Shopper Psychology

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