From food and clothing to entertainment and holidays, almost every industry operates promotions to hook customers. But price cutting is just half the story. Understanding why promotions work as successfully as they do requires an appreciation of the underlying psychological processes.
How incentives reduce perceived risk
A key consumer challenge is managing the uncertainty associated with unfamiliar products and services relative to the gains they might bring. Consumer psychology research consistently finds that introductory incentives lower the perceived risk of trying a new service, and casino welcome bonuses illustrate this dynamic clearly, offering new users a structured reason to explore a platform before committing fully to it. In terms of perceived risk, research in behavioural psychology shows that reducing this is one of the most powerful ways to increase conversion of new customers, which is why so many industries offer introductory prices.
New data released by the Office for National Statistics (ONS) shows UK retail sales have continued to grow and online spending has played an increasingly large role. Online sales have included some big peaks over seasonal promotional periods but it is the retailer’s offers that have encouraged spending above trend.
Cognitive shortcuts and the appeal of a good deal
Consumers are rarely entirely rational in their choices. In work on anchoring and consumer choice, researchers have found that consumers evaluate offers relative to a price or value that has been initially provided, or serves as a baseline.
Research into consumer discount behaviour also highlights the role of perceived fairness. Consumers enjoy the feeling of getting a great offer because it signals that the brand is willing to share the value. This subconscious reward can be a powerful enabler of brand trust over time.
Personalisation and the modern promotional landscape
Online personalisation, where offers and advertising are tailored to individual shoppers based on the wealth of data that retailers hold on consumers, is becoming more and more common. While using data to deliver more relevant promotions may be a good thing for both consumers and retailers, transparency over how the information is being used must be maintained to inspire trust, according to new ICO digital consumer guidance published today.
Research into government incentives as well as recent studies from UK behavioural insights teams, show that well-designed rewards can induce people to behave in advantageous ways without resorting to too much pressure. But the best incentives are those that tap into the customer’s current interests, and offer rewards which are pertinent to their existing behavioural patterns.
Understanding incentives as a consumer tool
Promotions operate through a number of psychological mechanisms relating to consumers’ views of risk, their reference points and their concern for fairness. Understanding these mechanisms can help both consumers and businesses make better judgements about promotions and help businesses design promotions that better reflect the value they offer.