Give it to Me Now! The Power of Hyperbolic Discounting
January 8, 2019
- Marketing •
Aden Andrus• January 8, 2019
If you work in online marketing, you know how important deals and promotions are. Your customers face a constant stream of advertising—if you want to stand out from the crowd, you need to convince them that your business offers the best discount around.
However, in many cases, you may not be able to offer “80% off + free shipping” coupons or similar discounts that would make you the obvious best choice. Maybe you aren’t selling a product you can discount or don’t have the profit margin to offer those kinds of incentives, but you still need to find a way to make buying from you as attractive as possible.
Fortunately, I’ve got good news for you.
A huge portion of purchase decisions are not made based on the actual discount you give, but by the way that discount is perceived. Even if the final price is the same, if your potential customers believe that your offer is better, they’ll pick you.
One great way to do that is to take advantage of a cognitive bias called “hyperbolic discounting”. While hyperbolic discounting might sound like a term psychologists invented to make themselves look smart (and, to be honest, this is probably true), it’s actually very easy to understand and use to improve your marketing results. Let’s take a look.
What is Hyperbolic Discounting?
Hyperbolic discounting operates off of a very simple principle: A bird in the hand is worth two in the bush. For example, if you’re buying lunch and the restaurant offered you a free sandwich today or a free steak dinner two weeks from today, which would you pick?
Odds are, you’d probably pick the sandwich.
To put it simply, the perceived value of a reward is influenced by how soon we can get it. And with good reason, how many of us have bought something with a mail-in rebate…only to forget to mail in that rebate and end up paying full price for the item anyways?
We’ve all been promised things that never panned out, so the further out in the future a reward is, the less we value it. So, if an item you want is 20% off today but you know that the item will be on clearance for 75% off in six months, you’re probably going to buy today. The wait is simply too long to justify the reward.
How to Use Hyperbolic Discounting
Now, all of that is well and good, but how do you actually use hyperbolic discounting in your marketing?
To put it simply, hyperbolic discounting works best when you use it on people who are looking to buy right now. These potential customers are already in purchasing mode, so incentivizing them to act right away only ads fuel to the fire.
If someone is in research mode—say, reading a blog post like this one—they probably aren’t looking to buy right now, so hyperbolic discounting won’t be very effective. People in research mode are already in a wait-and-see mindset, so they won’t be as motivated by an immediate reward.
As a result, hyperbolic discounting works best with paid search ads—especially bottom-of-the-funnel paid search ads. High purchase-intent keyword searches are the perfect place to use hyperbolic discounting to nudge people into making a purchase via your ads, landing pages and even remarketing. Here are a few ideas:
1. Time-Limited Offers
As it turns out, hyperbolic discounting is at the heart of many tried-and-true marketing tactics. Perhaps the easiest example of this is the time-limited offer.
This tactic works particularly well because it combines hyperbolic discounting with a sense of urgency. Not only do you get an immediate reward for choosing to convert now, you could also miss out on that reward if you don’t act right away.
And guess what? Urgency sells.
For example, promotional emails that convey a sense of urgency have double the transaction rates of standard marketing emails. Adding that sense of urgency to the subject line increases transaction rates by a further 16%!
Time-limited offers make people feel like they can have their cake and eat it, too…but only if they act now. It’s one of the simplest ways to use hyperbolic discounting, but it’s incredibly effective.
2. Rewards Programs
Rewards programs try to play the middle zone between immediate and delayed gratification. You get the reward of points now, but there’s also a long-term reward for repeated business. The size of your purchase can also influence how quickly you get your reward, too, so this tactic encourages people to buy more now so they can get their reward sooner.
The effectiveness of this sort of tactic really depends on the perceived value of the long-term reward and how long it takes to earn that reward. For example, many businesses offer a rewards program, but when your average item costs $5 and you have to spend $500 in a single month to get a $10 off coupon that expires at the end of the month, that’s not going to incentivize many people.
On the other hand, offer a free meal for every 10 meals you buy and people will be whipping out their punch card on a regular basis.
As a general rule of thumb, offering ten cents on the dollar or better tends to make for an incentivizing rewards program. Any less than that and hyperbolic discounting tends to work against you. The long-term reward simply doesn’t justify the short-term effort.
3. Free Shipping
When coupled with a minimum purchase threshold, free shipping is actually one of the most effective uses of hyperbolic discounting. The reward of eliminating the “penalty” of shipping costs from your order is so strong that many people are willing to spend more than they would pay for shipping to get free shipping.
Why? Well, shipping is a sunk cost. You don’t get anything for it. If you buy an extra item or two to get free shipping, you get something for that extra money—even if you spend more money overall.
And that’s the power of hyperbolic discounting. Instead of saving money by only getting what they want and paying for shipping, people will buy things they don’t necessarily want just to make sure they don’t have to pay the shipping “penalty”.
4. Deferred Payment Plans
Hyperbolic discounting actually works in reverse, too. Pushing something painful into the indeterminate future decreases your present pain, which feels like a reward to our brain. This is why we all struggle with procrastination. Does it ever actually make anything better? No, but it feels better, which is what matters.
This is particularly useful if you are trying to sell high-ticket items. Car salespeople love to offer “no down payment, no interest for six month loans” because buying a car is painfully expensive. The more you can defer the pain of paying for a big purchase, the more people will focus on the perks of that purchase instead of the costs.
And who knows? Offering a payment plan may also allow customers who couldn’t otherwise afford what you’re selling to buy, too.
Finally, since customers don’t have to pay you up front, you can up your prices without frightening off your customer base. In fact, this is usually a good strategy, since offering deferred payment plans does increase the risk that you won’t get paid, so you’ll want to account for that in your pricing.
5. Immediate Gifts
Another great way to incentivize people to act now is to give them an immediate gift. This is particularly useful if the real rewards of purchasing are somewhat delayed. For example, offering a gift card with a new subscription or a 20% off coupon for a future purchase with a purchase today are great ways to immediately reward your customers.
This reward doesn’t have to break the bank, it just needs to be enough that people feel like buying now is better than buying later (or worse, spending time looking for better options from your competitors). You simply need to make it feel like buying from you comes with all sorts of up-front value.
There are all kinds of ways to work hyperbolic discounting into your online marketing strategy. We’ve covered a few here, but now that you understand the principle, you should be able to apply it in a variety of ways.
Just keep in mind that hyperbolic discounting only works if the immediate reward is something people actually value. If shipping is only $0.99, offering free shipping might not be enough to tip the scales. Offering a keychain for signing up for your $600/year subscription plan will probably feel more like a slap in the face than an incentive.
For hyperbolic discounting to work, your rewards have to be meaningful to your potential customers. Otherwise, they won’t work (or worse, might frustrate or annoy people).
But, if you can identify rewards that your customers value and ways to offer them that make buying now seem better than buying later, hyperbolic discounting can be one of the most effective tools in your marketing toolbox.
By the way, if you’d like help finding ways to apply hyperbolic discounting to your marketing efforts, let me know here or in the comments. I’d love to help!
Have you ever tried any of the hyperbolic discounting tactics in this article? What were your results? Leave your thoughts in the comments.