The Psychology of Pricing: How Discounts and Promotions Influence Sales

Abstract

This research tries to analyze the role of psychological aspects, namely anchoring, price framing, and mental accounting, in affecting consumer reactions to discounts. Individuals use the reference price as the anchor and thereby make the discounts look larger than they really are. Such a cognitive bias called anchoring is a significant cause of consumption decisions. Similarly, pricing framing influences consumer perception such that absolute savings (e.g., "$50 off") are typically perceived as more attractive than percentage discounts, particularly for high-ticket items. In addition, other types of promotions, including direct discounts, coupons, and buy-one-get-one (BOGO) offers, don't affect every product or consumer segment equally. Direct discounts are best for obtaining short-term conversions, while coupons establish long-term loyalty, and BOGO encourages bulk purchasing. Overuse of discounts, however, can condition consumers, devalue perceived brand value, and damage profitability in the long term. To apply a best-practices pricing strategy, companies must balance revenue maximization in the short term with the development of loyalty over the long term. The tactical application of cognitive biases and affective drivers can help marketers maximize pricing structures to elicit the maximum level of consumer reaction without compromising brand equity. By harnessing a knowledge of these psychological drivers, companies can create more effective promotional campaigns that move product without compromising brand integrity.