Prices: What Discounts Do Consumers Prefer?

Discount promotions expressed in percentage terms rather than absolute values are typically those that consumers prefer when analyzing available purchase options.

Friday, July 26, 2019

Ariel Baños, a price management specialist and founder of Fijaciondeprecios.com, explains how consumers value discounts more, depending on how they are expressed in promotions at sales points and in advertising spaces.

Explains Baños: Suppose we have the opportunity to save $50 on our next purchase, and to achieve this, it is necessary to go through different businesses in search of the most convenient prices.

This savings opportunity will be much more likely to be taken advantage of if our goal is to buy a $10,000 ($200) television than if it were a $10,000 ($10,000) car. Why?

In the first case, the magnitude of "perceived savings" is 25% ($2,500 over $10,000), while in the second case it is "only" 0.5% ($2,500 over $500,000). As can be seen, in both situations the "pocket savings" is exactly the same: $ 2,500 (50 dollars).

In objective terms, and based on economic rationality, saving in money is equivalent, so the consumer should react in the same way, looking for savings or ignoring the opportunity, in both cases. However, in fact, there are more people who would seek savings in the first situation and not in the second.

How do you explain this situation? In practice, consumers prioritize the magnitudes of discounts in percentage terms when analyzing purchasing alternatives. This percentage indicates "perceived savings". However, the actual effect on the customer's budget would indicate that the relevant value is simply the difference in money: $50 is still $50, discounted from the price of a television, a car, or a luxury yacht.

See full publication at Fijaciondeprecios.com

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