According to a study at the University of Minnesota’s Carlson School of Management, report in The Economist …
When offered two deals on loose coffee beans: 33% extra free or 33% off the price, most shoppers considered them equivalent though he discount is by far the better proposition … it would take a 50% increase in quantity to be equivalent.
More generally, the researchers found, that shoppers prefer getting something extra for free to getting something cheaper.
For example, the researchers sold 73% more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount (even after all other effects, such as a desire to stockpile, were controlled for).
The main reason is “consumer innumeracy” … e.g. people can’t do fractions or simple math in their head.
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How can retailers compensate for (or exploit) consumers’ math blind spots?
One way is to befuddle them with double discounting.
People are more likely to think that a product that has been reduced by 20%, and then by an additional 25%, is a better deal than one which has been subject to an equivalent, one-off, 40% reduction.
Similarly, when evaluating a car’s fuel efficiency, consumers understand the number of extra miles per gallon it gets, more so than the equivalent percentage fall in fuel consumption.
We’re not talking calculus, we’re talking fractions … ouch.