Perceived Value Is Reality
Closing the sale is a delicate and at times unpredictable process. Consumers have varying reasons to reject or accept an offer and often some incentive is necessary. But what kind of incentive is most effective and brings the most return for the retailer? A discount? A gift? Free shipping?
The impact and value of the word “free” shouldn’t be overlooked, but neither should the cost of offering something for free. Especially, though, retailers should consider what market researchers are calling the “perceived value differential” or PVD for short.
On the consumer side, it’s pretty simple math and the goal is straightforward: get the absolute most for my hard-earned money. It’s far more complicated for the seller, who must develop a moneymaking strategy via profits and loss equations or cease to do business at all.
GetElastic quotes marketing researcher Dr. Flint McGlaughlin labeling the cash discount as the worst incentive one can offer. That’s a general statement, and likely one not applicable to all situations, but it makes sense on a few levels. Offering $10 off is a straight cash loss to the retailer, and leaves that $10 out in the Wild West of commerce. Better incentives would include a $10 gift card, where a customer might spend more than that amount on a second purchase at the retailer’s store, not another place.
For online purchases, it doesn’t take long for a consumer to weigh a cash discount against the cost of shipping. It the shipping cost is more than the discount, then the discount could mean very little. Free shipping, by the way, has been cited repeatedly as the most sought-after incentive by customers. It only works for the retailer, though, if shipping costs can be worked into the overall pricing scheme. It may only cost $4 to ship an item, or $20.
An important distinction there is the perceived value of shipping the item. In all likelihood, the consumer is unaware of the actual cost of shipping without knowing the weight, distance, courier, or bulk shipping arrangements. But it is possible (even likely) the customer perceives the cost of shipping is higher than a cash discount offered elsewhere.
Let’s be honest about the ease of comparison-shopping online, while we’re at it. The retailer’s goal is to bring the total cost of the item down below what competitors offer. Perhaps your biggest competitor offers the same product you do at $40, plus $10 shipping. Perhaps that same competitor inflates shipping costs to make up for a steeper, heavily promoted discount. If you could bring that total cost somehow to $45, even if it means $45 price and free shipping, you win.
Another incentive that carries perceived value is a free gift. The MarketingExperiments.com study looked at offering a half-pound of gourmet coffee with purchase versus a free steel thermos. There is very little difference in the cost of the two items ($2 vs. $3), but because the perceived value of the thermos ($15) is twice that of the coffee ($8), the PVD of the thermos ($12) brings back a higher return on incentive (ROIc).
We play this game in other economies as well. This very recently-passed holiday season, recipients of a $25 restaurant gift certificate needn’t know the giver paid only $2 for it during a last-minute online promotion. The recipient gets perceived (and real) value and gives the giver much (perhaps disproportionate) thanks.