The Rule of 100 by Dr. Charles Waldo

It’s all in how you frame the deal

Many HCBM readers run “sales promotions” of various kinds for their businesses, often involving pricing issues. Maybe it’s “Buy one, get a second at 50% off.” Perhaps it’s “$5 off the regular price,” or, “10% off the regular price.” Whatever the “formula,” the seller wants to move product. But what pricing strategy will best do that?

Dr. Jonah Berger, Marketing Professor at the Wharton Business School (University of Pennsylvania) offers some useful insights on this question in his book Contagious: Why Things Catch On (Simon & Schuster Publishing, 2013). The book is chockfull of findings from the behavioral sciences explaining why consumers act as they do – sometimes in ways that appear on the surface as irrational. One strategy Berger describes is the……

 

Rule of 100

How promotional offers are expressed plays a role in maximizing volume and profits. Some offers are expressed as cents or dollars off, or absolute discounts (10 cents, $5, or $50 off). Other offers are expressed as percentage, or relative discounts (5% , 50%, and so on) off list price. Does the way a promotion is framed (as a money amount or as a percentage off) affect how big the discount seems, and thus make it more attractive?

Example: Take twenty percent off a $25 shirt. The same reduction can be represented as either “20% off” or “$5 off.” Which seems like the better deal to a potential buyer?

Or think about a $200 price reduction on a $2,000 laptop computer. The same reduction can be expressed as “10 percent off” or “$200 off.” Does one method of discounting make the deal seem better than the other?

Researchers have found that it depends on the original price. For low priced products like groceries or books, price reductions seem more significant when percentage terms are used. Thus, “20% off” that $25 shirt ($5) seems like a better deal than “$5 off.” (Do you agree?) However, for higher-priced products, such as that $2,000 laptop computer, the opposite is true. For big-ticket items putting the price reduction in dollar terms ($200) rather than in percentage terms (10% off) makes it seem like a better offer. The laptop seems like a better deal when advertised as “$200 off” rather than “10% off.” (Do you agree?)

A simple way to figure out which discount method will seem larger to potential customers is by using something called the “Rule of 100.”

If the product’s price before discounting is less than $100, the Rule of 100 says that percentage discounts will seem larger. For a 20 percent discount on a $30 polo-shirt, $6 seems like a relatively small number. But, stated as a percentage reduction of 20 percent, the same discount mentally seems much larger. (Do you agree?)

If the product’s original price is more than $100, the opposite is true. Here numerical discounts will seem larger to the potential buyer. Take the $2,000 laptop. While a 10% discount may seem like a relatively small number in and of itself, it immediately seems much bigger (and more favorable) when translated into dollars. ($200)

So, when deciding how “good” to make a promotional offer seem, consider using the Rule of 100. Think about where the original price falls relative to $100 and how that affects whether absolute ($) or relative (%) discounts will seem more attractive to potential buyers. Under $100 use percentage. Over $100 use dollars.”

Real world practices

To see if merchants in the real world use the Rule of 100 I went through the various sales promotion inserts in a recent Sunday edition of The Indianapolis Star. Dozens of
sellers advertising probably thousands of “deals” reviewed. As you might imagine, a variety of pricing techniques were used with the Rule of 100 seeming to come into play some of the time but certainly not in a majority of the cases. Some stores used a variety of pricing methods (both percentage and $ off) in their inserts while others stuck to just one method.

What do you think? What’s been your experience as a buyer and, perhaps, as a seller? Does the Rule of 100 work? Please feel free to share your experiences by contacting me at the email address below.

by Charles Waldo
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Tags: Business Management