The Rule of One Hundred: The Perfect Discount

ContagiousAs a retailer the tactic of discounting is a centuries-old move and can be quite powerful. However, have you stopped to think about why some things seem like a great deal while others—despite a hefty discount—come off as unimpressive?

Smart-guy Jonah Berger did. He's a professor of marketing at the Wharton School and author of the NYT's bestseller Contagious: Why Things Catch On.

Fuzzy Math: What Makes Something Seem Like A Good Deal?

What makes something seem like a good deal? Subtle ways of framing the same information can make consumers more compelled to purchase.

Every day, consumers are bombarded by discounts; 5% off this, 20% of that or 30% off something else. $5 off your grocery bill, $20 off a phone or $15 off your purchase if you spend more than $150.

The goal of such offers is to pique consumer interest and increase demand. People will buy more, or buy more often, than they would have otherwise.

But for that to happen, the deal has to compel consumers to take action. There are thousands of coupons, discounts, and deals out there, and it’s impossible to pay attention to all of them. So what helps a particular deal cut through the clutter? What makes a certain deal seem, well, good?

One simple way is something called The Rule of 100. Imagine you are having a sale. Usually a particular t-shirt costs $20 per shirt, but for the sale you’re going to mark them down to $15 a piece.

There are two ways you could advertise that discount. One would be as a percentage. Going from $20 to $15 would be 25% off. But you could also represent that same amount as an absolute number, $5 off. Which way is better?

Go ahead, check my math. Or just take my word for it. Both discounts lead to the same final price. 25% off $20 and $5 off $20 both leave the customer paying $15 for a shirt. So both ways of representing the discount should have the same effect, right?

Nope. Turns out consumers find the discount more attractive, and are more compelled to purchase, when it’s 25% off (compared to $5 off). While the two discounts are the same economically, they don’t feel the same psychologically. One feels bigger than the other.

So does that mean that percentage discount are always more effective?

Not quite. Take the same situation but up the stakes. Rather than a $20 t-shirt, think about a $2,000 road bike. A 25% discount would take it down to $1500, and $500 off should equal the same amount. In both cases, the bike would cost $1500.

But it doesn’t feel the same to the consumer. For a $2,000 item, $500 off seems larger than 25%, which makes people more likely to purchase when they see the absolute dollar discount.

The Rule of 100 says that under $100 the percentage discounts seem larger than absolute ones. But over $100, things reverse. Over $100, absolute discounts seem larger than percentage ones.

So next time you’re marking down a product, pay attention to how it’s presented. The way changes are represented can have a big impact on how they’re perceived.