Posted in Customer Service, Management, Marketing, Retail Operations, Selling & Persuasion

Discounting kills performance

The same, cheap head-ache tablet is actually less effective than the same expensively priced option.

Read that again slowly because it is really powerful. In a study by Shiv, Carmon and Ariely (2005), they have established that discounted products are not only perceived less favourably by customers, but discounting actually detrimentally affects performance.

In one example, respondents who drank a discounted energy drink actually performed worse at solving puzzles because they believed the product did not help us much with concentration, causing them to physically perform worse than the control group.

Similarly, cheaper headache tablets actually take longer to work and were less successful at reducing headaches.

Discounting has the following – now scientifically proven- consequences:

  • Perceptions of poorer quality,
  • Belief that product tastes differently (inferiority)
  • Belief that a product does not work as it should (efficacy)
  • And…this is the killer: not only are discounted products perceived to be less effective, they ARE less effective. Through the so-called placebo effect, these beliefs and perceptions are transformed into less effective performance – a classic case of perception becoming reality.

What this means that discounting reduces the ability of a product to perform. (Of course there are products that may not be affected by this phenomenon, but not as many as you may think at first.)

The solution is very simple, but the difficulty is coming up with an alternative to the pricing tactic of first resort – discounting.

The solution to this can be found in understanding and de-constructing the value proposition.  More about that in a future post.

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3 thoughts on “Discounting kills performance

  1. Hi Dennis,

    me again. 😉

    Don’t you think that people use price as an indicator for quality when they are not themselves confident of how to assess the offering?

    I would have thought that “price as proxy for quality” is less relevant in situations where people have a strong view about the quality of the product, even if they are wrong.

    The Shiv paper focuses on the efficacy of a “nutraceutical”, where almost by definition the consumer is uninformed as to the real quality of the product.

    (As an aside, I don’t think that the groups in the test were controlled for how hard the students tried. The students knew the claimed effect of the product, they used the product, and they knew what it was supposed to deliver. I would argue that those who paid more tried harder to get the outcome that they believed ought to eventuate, in order to relieve the cognitive dissonance associated with paying for the product — and hence having an investment in the brand’s promise — and having incontravertible evidence of the actual efficacy of the product.)

    Conclusion? It’s a stretch to draw the result of that study beyond the fairly narrow scope of the product that they considered. It would be ground breaking research if you could prove that the phenomenon applied universally (I think.)

    P.

    Like

  2. Peter
    Point 1- Mostly so, I would agree, nut then again how many products out there does anyone really anything about? Plasma, soft drink, piece of jewelery,bed? Who would back their own judgment on any of those?
    Point 2- The study does not stretch to all products as is scientifically proper. BUT I DO – in the interest of conversations like these. And in response: I would say, based on my experience, that dissatisfaction is almost always the flip-side of a bargain. Who does not start worrying as soon as they bought the bargain? Is it really good for anyone’s self-image that they have to report to bargain-hunting? I would argue that few people really feel clever or superior when hunting down a bargain… so in the vast majority of cases a discounted product is a bit like a sugar-fix: quick high followed by a long low.
    Point 3- Not sure about the actual control group/ integrity of research, but again I can see exactly how people would develop back pain from a “cheap” bed for instance and also many more examples. Large part of that is a because these findings support a gut-feel I have carried for a while.

    Thanks for commenting 🙂

    Like

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