This article is an excerpt from our ebook Sales Promotion: How to improve the performance of your investments which you can download for free.
A particular shortcoming of traditional promotional practices is their reductive approach to one element in particular: the price. It is a tried and tested argument, but in reality the purchasing process is much more complex as each individual is influenced by many emotional and psychological determinants, in addition to the price itself.
But which determinants influence consumers the most?
The Reference Price
“The customer’s perception is your reality”
During the purchasing process consumers build different expectations on what a fair price for a good or a service is. A consumer’s buying decision is not influenced by the potential change in overall wealth, but by how much the price differs from the reference point. The reference price determines if the consumer perceives the promoted price as a good or bad deal. The difference between the given price and the reference price is finally perceived as a win or a loss, and influences the buying decision.
The Loss Aversion
“Losses loom larger than gains”
Loss aversion shows that consumers are more sensitive to losses than to wins of an equivalent size. This means that a consumer’s negative reaction to an increase in prices is greater than a positive reaction to a decrease in prices of the same amount. Loss aversion is one factor that drives the success of sales, especially when used with limited time offers, as it represents a future potential loss for the consumer.
The Framing effect
“Don‘t wrap all the Christmas presents in one box”
Another important aspect to consider is the framing effect, which is deeply linked to loss aversion. The decision frame can be explained as the perspective through which a decision maker views different alternatives. This influences the consumer’s perception as it is not about what is said, but how it is said. Talking about price framing, retailers can change the context of a price presentation without substantially changing the price itself to increase sales.
One size doesn’t fit all!
Your customers are unique, and they do not always take rational decisions as they are driven by cognitive and emotional processes. A better understanding of your customers and their reactions to different promotional messages is the key to optimising your promotional strategies in order to encourage purchasing and to overcome the limits of traditional “one size fits all” promotions.