Imagine you are about to set up a tiered discount structure. If your customers spend more than $100, they receive 10% off; if they spend more than $200, they get 15% off, and so on.
How should you set up the tiers? We will find out today.
Let us assume we create a tiered discount structure with two tiers.
One at "spend $100 and receive 10% off" and one at "spend more than $500 and receive 30% off."
What happens? Researchers ran a study and found out, 85% would spend according to the first tier, 7% would spend according to the highest tier (more than $500), and 8% would spend below $100 and not reach the first tier.
How could we change the distribution?
Researchers predict that if consumers treat tier thresholds as goals, tier increment size design should impact consumer motivation to spend because they theorize that tiered discounts with smaller increment sizes will encourage more spending because the higher thresholds feel more within reach.
Smaller increments make (higher) thresholds feel more within reach.
The researchers exposed the participants in this experiment to another set of tiers. Now they moved the lower tier from $100 to $400. Thereby, they reduced the distance between the two tiers from $400 ($500 - $100) to $100 ($500 - $400).
What happens now?
As predicted, more customers would spend above the highest tier. The share of customers spending more than $500 more than doubled from 7% to 15%.
Similarly, 50% spent more than $400. Spending in no tier is at 35%. Compared to the initial setup with the lower lowest threshold of $100, it is quite high. However, overall, more customers are spending at higher thresholds.
Then the researchers added more small incremental tiers...
spend more than $100, $200, $300, $400, and more than $500. So we have five increments in total.
What happens here compared to the initial setup with only two tiers, and the lower tier is very low with a large distance to the highest tier?
Customers are motivated to spend at higher tiers. However, they do not reach the highest tiers. Although they take smaller incremental tiers as their spending goal, customers get stuck on the way to the highest tiers.
Now we compare the average spending per customer across all these three different tiering structures:
- two tiers with a large distance,
- two tiers with a small distance, positioned at the upper end, and
- five tiers with small increments.
The highest spending is with only two tiers at the higher end, with a small increment.
Raising the lower threshold from "spend $100" to "spend $400" more than doubles the budget customers would spend.
What did we learn today?
Today we learned that the tiering structure of your discounts directly impacts your customers' spending motivation.
If you are sufficiently strategic with your tiers, you can dramatically increase the average spending per customer on your discounts.
References
Cheng, A., & Ross, G. R. (2022). Tiered discounts as multiple reference points for spending. Journal of Consumer Psychology. Online version of record before inclusion in an issue.