How hyperbolic discounting affects consumer behaviour and marketing strategies
Hyperbolic discounting is a phenomenon in which people prefer smaller, immediate rewards over larger, delayed ones, even if the latter would ultimately be more beneficial. People prefer immediate gratification over long-term benefits, even if the long-term benefits are greater. This tendency to discount the value of future rewards at a higher rate than is mathematically optimal can lead to impulsive decision-making and difficulty in achieving long-term goals. This can lead to irrational decisions that are not in the consumer’s best interest.
In marketing, hyperbolic discounting can have a significant impact on consumer behaviour. For example, consumers may be more likely to choose a smaller, immediate reward over a larger, delayed reward. This can be seen in the case of promotions such as discounts, where consumers may be more likely to purchase a discounted item even if it is not the best value in the long run.
Brands often use this knowledge to their advantage. Here are some examples —
Limited-time offers: Many brands use limited-time offers to create a sense of urgency and get consumers to act quickly. For example, a restaurant might offer a discount on a meal if the customer orders within the next hour. This appeals to the consumer’s desire for immediate gratification, as they can save money by acting quickly.
Rebates and mail-in offers: Some brands offer rebates or mail-in offers that require the customer to act after the purchase. For example, a consumer electronics company might offer a $50 rebate on a product if the customer fills out a form and mails it in. This appeals to the consumer’s desire for immediate gratification, as they can save money on the purchase by simply taking action.
Bundling: Brands often bundle products together and offer them at a discounted price. This appeals to the consumer’s desire for immediate gratification, as they can get multiple products for a lower price than they would pay individually.
Financing offers: Many brands offer financing options that allow consumers to pay for a product over time. These offers often have high-interest rates or hidden fees. Still, it appeals to the consumer’s desire for immediate gratification, as they can get the product they want without paying the full price upfront.
Buy-one-get-one-free (BOGO) promotions: BOGO promotions are a common marketing tactic retailers use to encourage customers to purchase. The hyperbolic discounting effect comes into play when customers perceive the free item as being more valuable than it is. This encourages them to purchase even if they might not have otherwise.
Hyperbolic Discounting on Credit Cards
Offering immediate sign-up bonuses for new customers: Credit card companies might offer a small reward for signing up for their card immediately, such as a few thousand reward points, welcome vouchers, or a small cashback. This leverages the hyperbolic discounting bias by making the immediate reward more attractive than waiting for a larger reward later.
Short-term promotions: Companies might offer promotions for a limited time, such as extra cashback for spending a certain amount in the next month. This leverages the hyperbolic discounting bias by making customers prioritize the short-term reward over a potential reward in the future. Example — Earn 500 bonus reward points on card purchases of over ₹40,000 in a month
Easy sign-up process: By making the sign-up process quick and simple, credit card companies can leverage hyperbolic discounting to get customers to sign up for their credit cards without considering the long-term consequences.
Loyalty Programs
Loyalty programs are an effective way for brands to retain customers, but to make them more effective, companies have started incorporating the concept of hyperbolic discounting, which taps into the customers’ desire for immediate gratification. One example of this is offering more cashback or points if the customer places an order within a specific time, encouraging them to make an immediate purchase rather than delaying it.
Real-time offers are another way to provide immediate rewards to customers. When a customer browses a company’s website or visits a physical store, personalized offers and rewards can be suggested to them, such as discounts on related products or free shipping on their current order. This provides an instant reward and encourages the customer to make a purchase.
Gamification is another effective technique used in loyalty programs to reward customers immediately. Customers can receive bonuses or badges for completing tasks like purchasing or referring a friend. These rewards provide an immediate sense of accomplishment and satisfaction rather than waiting for long-term rewards.
Another example is offering exclusive access to events or limited-time products to customers who have been loyal to the brand. This creates a sense of urgency and excitement among customers, encouraging them to purchase to take advantage of the exclusive offer immediately.
Tiered rewards systems can also appeal to hyperbolic discounting by offering incremental rewards as customers reach different levels of loyalty. For example, customers may receive an immediate discount or bonus when they reach a certain spending threshold, but they may also be motivated by the promise of more rewards at higher spending levels.
Social proof and peer influence can also motivate customers to prioritize immediate gratification over long-term rewards. Seeing others share their rewards or experiences on social media, for example, can create a sense of FOMO (fear of missing out) that can push customers to participate in a loyalty program or make a purchase to get in on the action.
In conclusion, incorporating the concept of hyperbolic discounting into loyalty programs is a powerful way to incentivize customers to make immediate purchases, leading to increased sales and customer retention. By offering instant gratification through real-time offers, gamification, and exclusive access, brands can create a sense of loyalty and satisfaction among their customers.
The Other End
However, hyperbolic discounting can also challenge marketers, as consumers may not be willing to wait for long-term benefits. For example, if a product promises long-term benefits such as weight loss or improved health, consumers may be less likely to purchase it if they do not see immediate results.
To address this challenge,
Framing: Marketers can frame the long-term benefits in a way that makes them more appealing in the present. For example, instead of highlighting the long-term health benefits of a product, they can emphasize the immediate feeling of increased energy or reduced stress that the product provides.
Personalization: Marketers can personalize their messaging to make it more relevant to the consumer’s individual needs and goals. By doing so, they can help consumers see how the long-term benefits of a product can align with their immediate desires.
Social proof: Marketers can use social proof to demonstrate how others have experienced long-term benefits from the product. Testimonials, reviews, and case studies can help consumers see the product's value beyond its immediate benefits.
Showing how other customers have benefited from a product or service in the long term can create a sense of social proof and influence immediate purchase decisions.
Trials: Another way to overcome hyperbolic discounting is to offer trial periods or free samples of products or services. This allows customers to experience the immediate benefits of a product or service before committing to the long-term benefits.
Urgency: Marketers can focus on creating a sense of urgency or scarcity around their products. This can be achieved through limited-time promotions, exclusive offers, or product scarcity. By creating a sense of urgency, marketers can make their products more appealing to consumers and encourage them to take action.
Finally, marketers can use behavioural economics techniques such as anchoring or other cognitive biases to shift consumers’ focus from immediate gratification to long-term benefits.
In conclusion, hyperbolic discounting can significantly impact consumer behaviour and marketing strategies. By understanding how this cognitive bias works, marketers can tailor their strategies to better appeal to consumers and encourage them to purchase. By offering immediate rewards or creating a sense of urgency, marketers can overcome the challenges posed by hyperbolic discounting and achieve greater success in their marketing efforts.