We all love sales. OK, maybe we don’t ALL love them, but we all have made a discounted purchase. But why do discounts work so well? To understand this, we can look at discounts from the perspective of psychology.

Buyers always have a reference price in mind when they are looking at your price. This will help them decide if your price is too high, low or just right for them. When the regular price is shown next to the discounted price, this will increase the reference price in the buyer’s mind. Furthermore, discounts, which are typically only available for a limited time, create a sense of urgency. These create a setting where buyers are more likely to make quick decisions.

What's good about discounts?

Discounts aren’t useful in all cases. When purchase decisions take a longer time, the promise of a discount will not be as effective as when purchases are made quickly without too much thought. However, discounts are a valuable tool when you want to sell more, and your buyer group is likely to make quick purchase decisions that use type 1 thinking.

Discounts can also be useful when launching a new product or service. Including a discount during the launch can help make the purchase decision simpler for a buyer. In addition, the discount can reduce the risk of buying a new product or service from the perspective of the buyer.

What's bad about discounts?

Typically, discounts need to be significant to work. Research suggests that small discounts under 5% don’t work. In fact, in many product categories, customers even expect large discounts ranging between 20 and 80%.

With such large price decreases, the profit margin takes a large decrease. In these cases, you also need to sell a lot more to offset the reduced price to maintain the same profitability. For example, a 10% discount typically will require a 25% increase in unit sales. Are you certain that your discount will attract that many new buyers?

Furthermore, if discounts are regular, buyers start to wait for them to make purchases. In these kinds of cases, the discount starts to diminish the product value, and their impact on increasing sales disappears.

How can I make discounts work for me?

Like with anything, discounts can be made more effective with a clear strategy in mind. These simple steps can help you define your discount strategy.

Step 1. Have a clear goal in mind

When setting a discount, you should know how much more you exactly want to sell. You should also know who you are selling to and what kind and how large of a discount you need to sell to them.

Step 2. Use a discount calculator to estimate the impact of the discount on your sales and profitability 

Download our discount calculator to your email from the end of this article. This tool can be used to understand if it makes sense to offer a discount of that size.

Step 3. Test the discount on a small sample

When you want to launch the discount, why not first test with a small group of customers? This will give you a real idea of how well the discount will work.

Step 4. Offer the discount to your customers

Analyze the results and use these learnings to guide your future pricing decisions.

How much more do I need to sell to offset the price reduction?

Download our discount calculator to your email blow to calculate how a discount can impact your sales and profitability.

Download the discount calculator