We all know about the power of strikethrough prices. You see a higher former price and a lower selling price. And this difference, this perceived initial discount, makes your offer more attractive, so you are more likely to buy it, and the strikethrough price ultimately grows your revenue.
However, how does a higher strikethrough price also affect your margin, i.e., the profitability of a product or offer?
We will find out today.
Let us look at the context of durable products, for which negotiated discounts are common – like furniture, home electronics, or appliances. The researcher drew on a rich data set and analyzed data from real customer transactions.
In this analysis, the researcher included more than 220,000 products purchased in more than 40,000 orders for about 30,000 consumers.
He confirmed that 81% of the products had a higher posted price than the selling price, and the average negotiated discount was 3%.
What was the overarching research question?
The researcher wanted to know the impact of a higher strikethrough price or initial perceived discount on the negotiated discount.
In this study, the researcher checked three outcomes of a higher initial perceived discount:
- The probability of choosing the article,
- the likelihood of starting a negotiation, and
- the magnitude of the final negotiated discount.
What did they find out?
The researcher found that the probability of choosing an article with a higher initial discount is… higher. This is not too surprising and very well-researched.
Let us move to a more surprising result.
The researcher also found that an initial perceived discount – i.e., a higher reference price – also increases the margin (not only the revenue) by reducing the negotiated discount.
In this dataset, the researcher found that a $1 increase in the initial perceived discount leads to a 6.6-cent reduction in the negotiated discount.
So you have a direct impact of raising your strike price on the negotiated discount that your customers demand.
But where does this negotiate discount reduction come from?
The researcher conducted a follow-up lab experiment and checked the sources contributing to the lower negotiated discount.
He found that a higher initial perceived discount reduces the likelihood of starting a negotiation. This accounts for 55% of the overall reduction in the negotiated discount.
Vice versa, the magnitude of the negotiated discount is also reduced due to a higher initial perceived discount. This accounts for 45% of the overall reduction in the negotiated discount.
Customers who see a higher strikethrough price and perceive a higher initial discount are less likely to start a negotiation, and they are less likely to demand a higher reduction because the initial discount is already high.
What did we learn today?
We learned today that we have the incentive to raise the initial perceived discount by increasing a strikethrough price and reference price.
And this is for many reasons:
- The obvious reason is the offer is more attractive. Customers are more likely to buy it, and the revenue increases.
- But the most overlooked reason is that the margin also increases in a context where customers can negotiate prices.
- We found out that customers are less likely to start a negotiation if the initial perceived discount is higher. And if they do, the demanded negotiated discount is lower.
References
Jindal, P. (2022). Perceived versus negotiated discounts: The role of advertised reference prices in price negotiations. Journal of Marketing Research, 59(3), 578-599.