Tuesday, March 13, 2012

Why free delivery can beat % off discount

Walking past a bedding retailer the other day and the sign on the pathway caught my attention as a nice little example of applied Behavioural Economics.  "Today only.  Free delivery".  Delivery costs around $40, so offering it as a free service is the equivalent of around a 10% discount on  a queen size mattress retailing for $400, but they chose to advertise the free service rather than reduced price.  Why?  Because 'free!' is much more behaviourally persuasive than a mere discount.

The online behemoth Amazon was one of the first to use this technique online.  Amazon offer free shipping for books over a certain value ($25), and what they find is people prefer to spend more to qualify for the free shipping than pay for the service.  In other words, people buy two books and spend more than $25 just to avoid paying a few dollars for shipping.

The behaviour behind this is loss aversion. We hate to lose and paying for a service like postage from which you gain little, is simply painful to our psyche.

Whilst the Amazon model is great for customers in the US, not so for us internationals!

Enter The Book Depository UK that offers free shipping anywhere in the world for any book.  Whilst the list price for the item is usually higher than Amazon, shipping is free.  By way of example, "Disrupt! Think the Unthinkable to Spark Transformation in Your Business" by Luke Williams is available on Amazon for $16.79 plus $9.81 shipping so the total is $26.31.  On The Book Depository the book is $24.74 inclusive of shipping.

The Book Depository has hooked into a key behavioural element here; we don't like to feel that we are paying for services related to the product.  Whilst I know that the higher listed price must cover the cost of shipping, to me the value of the purchase is in the book - the thing I am seeking to buy.  I feel better paying more for the item than I do for services that really have nothing to do with the product itself.  I will retain the book, I don't retain the delivery service.

And this is the genius of the free mattress delivery. I keep the mattress, I don't keep the delivery. Discount the element of your offer in which I see no ongoing benefit and I'll be a happy shopper.  So when you are next seeking to attract buyers to your shop, consider which elements of the product you are best to discount.  Scrapping annoying services costs might be a great place to start.

PS If you like my blog, I'd love you to consider supporting my fundraising trek of the Larapinta trail. Every bit helps so to find out more, visithttps://www.gofundraise.com.au/page/BriforICV Thank you!

1 comment:

  1. This is an important lesson concisely put with some great examples. I'll be sharing it in my next Terrific Tips e-newsletter with of course proper attribution and a link to this article. Great stuff, thank you.