Effort-Based Discounts: Attract Price-Sensitive Customers while Avoiding 5 Common Revenue Traps
Pricing Pointers, Issue #18
An effort-based price discount is a reduced price offered to all buyers, but it requires them to accept some hassle or inconvenience to get it. The core idea is that only the most price-sensitive users will make the effort to secure the lower price. This is because they perceive the discount as worth the extra time and effort it takes to get it, and their willingness to undertake the required effort signals how much a lower price really matters to them.
Here’s another example: rush lines at a live theater. Suppose an hour before the curtain rises, the theater reduces the prices of all its unsold tickets to a single, low price. These tickets are sold on a first-come, first-served basis at the box office. The people in line get the best available seats when they reach the ticket window. The earlier one queues, the better one’s chances of both getting a reduced-price ticket and a great seat.
However, there’s a trade-off between time and risk. The earlier you queue, the more likely you are to get a great seat at a great price. But the more you must pay in terms of time and inconvenience. You can save time by joining the queue later, but then you increase the risk of not getting a ticket at all. For theater lovers who don’t want to waste their time standing in line, or risk not getting a ticket, there’s a simple solution: buy a ticket at its face value. By spending money instead of time, they have the certainty of a seat.
For the theater, an unsold seat at curtain time is a lost revenue opportunity. At this point, it’s better to get some ticket revenue than nothing at all, as long as the ticket price exceeds the cost of seating one more person. The built-in hassles of getting a reduced-price ticket also discourage people who would otherwise pay full price from joining the rush line.
Some Potential Pitfalls of Effort-Based Price Discounts
Arbitrage: If the product is storable and transportable, arbitrage (reselling) can occur. Buyers who obtain the discount might purchase large quantities and resell them at a higher price to less price-sensitive customers or to those who didn’t exert the effort. This can lead to a loss of total revenue and profit for the seller, especially if the discount is large enough to make reselling profitable.
Cannibalization of Future Sales: When products are storable, effort-based discounts can encourage stockpiling. Buyers stock up on the discounted item, which cannibalizes future full-price sales as they draw down their inventory. This means sellers get their money earlier, but at a discount, which can potentially reduce overall revenue. On the other hand, if buyers are loading up on a company’s product, they won’t be buying a rival’s product in the meantime.
Management Costs: There are the costs of setting up, monitoring, and processing coupons, rebates, price adjustments, etc. The more complex the scheme, the more expensive it is to set up and manage.
Training Customers to Expect Discounts: Overuse of discounts can train customers to expect them for future purchases. This can lead to customers waiting for sales or promotions, potentially eroding the perception of the “normal” price.
Failure to Attract the Desired Segment: If the effort required is too great, or if the savings aren’t significant enough, even the most price-sensitive customers may choose to forgo the discount. Conversely, if the required effort is too small, less price-sensitive buyers may still exert the effort, leading to lost revenue from this segment.
Safeguards
Effort as a Self-Sorting Mechanism: The fundamental safeguard is that the effort itself acts as a device for sorting buyers by how price sensitive they really are. By requiring an inconvenience (e.g., filling out paperwork, queuing, clipping coupons), only those who truly value the lower price will expend the effort.
Universal Availability, Selective Attractiveness: The discount should be made available to all buyers but structured so it is attractive only to specific segments. This helps to mitigate perceptions of unfairness since everyone theoretically has the same opportunity.
Focus on Cost of Time: Effort-based discounts effectively target buyers who value their money more than their time. These individuals typically have a lower opportunity cost of time and are therefore more willing to spend it to save money.
Ensure Perceived Value Outweighs Effort Cost: The inconvenience or hassle must be proportional to the savings offered. If the necessary effort is too high relative to the discount, customers won’t bother.
Modest Discounts for Storable/Transportable Goods: For products susceptible to arbitrage or stockpiling, keep the discounts modest. This prevents it from being profitable for customers to resell their purchase at a higher price, or for regular users to excessively stockpile the product.
Use Temporary or Limited-Time Offers: Use discounts that are brief and irregularly occurring. This prevents customers from habitually expecting them and helps to avoid establishing a low reference price.
Strategic Takeaway
The effectiveness of an effort-based discount depends on your understanding of your customers. The goal is to create an effort barrier that is just high enough to discourage full-price buyers. At the same time, this barrier must be acceptable to your most price-sensitive customers. This balance allows you to attract more buyers, and increase your revenue, without resorting to an across-the-board price cut.