What tastes better, an AED 35 burger or an AED 70 burger at a 50% discount? You’d be forgiven for thinking the latter because it’s likely to be of better quality but think again.
Food & beverage business managers tend to set the prices of their products and services based on the maximum profit they can make. So the rationale here is to figure out the maximum amount that customers are willing to pay (with all the costs involved) and the strategy behind it so that you can estimate the volume of sales necessary to meet the estimated profit.
This explanation may be oversimplifying a more complicated marketing strategy, yes, but this takes us to the next point of consideration. When offering discounts, we expect this will drive additional footfall and subsequently improve sales to customers that may not be likely to buy the product or service otherwise. But, if everyone is offering discounts in a limited market, does this actually offset losses due to reduced profit margins? Is today’s excessive discount culture a killer of innovation? Or does it trigger it? And, if all discounts disappeared, would that regulate prices and competitiveness?
Some restaurant operators have taken a solid stance to avoid discounts altogether, while others have become so dependent on deals that they can no longer step away from them. These aggregators base their business models on offering new deep discounts, constantly hooking customers into this system. These brands certainly stand out…but do they stand out for the right reasons?
Undoubtedly, offering a discount is a fantastic marketing tool to introduce your brand to an unknown market. Still, it also creates dependency, especially when your most loyal customers become so accustomed to the bargains that these platforms offer. And we know all too well that there’s always a new place, with a bigger discount, which only pressures you into matching or bettering what they are offering. This is the vicious cycle that becomes a trap because of the so-called ‘sunk cost fallacy’.
Several factors influence the consumer’s behaviour and perception of value including, initial value, consumer’s attitude towards the product, the expertise and knowledge of the consumer, and previous experiences.
Here, it is important to mention the Prospect Theory (Kahneman & Tversky, 1979), where individuals make decisions based on their perceived gains instead of perceived losses1. For example, a customer that sees a product at 35 AED and what appears to be the same product of a different brand at an equal value of 35 AED after a 50% discount will value the latter more. This is because the second is perceived to be of higher value due to the anchoring effect2. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments.
In theory, this makes sense. However, what happens when the first business manager needs to resort to lowering the price even more? The vicious cycle is set in motion, and the sunk cost fallacy sets in. And then there’s a deeper underlying problem: Who really ends up paying for these discounts?
If you price your products knowing that your regular price will only be paid two days a week, how do you manage your expenses? Will your landlord give you a better deal because the market is highly competitive? Will your suppliers lower their prices despite already having low margins? Unfortunately, not. You barely have any negotiating power there. So, who ends up being squeezed the most? You guessed it: The Staff.
So, the next time these deep discounts entice you, ask yourself if you want to be a part of this vicious circle because, in the end, someone has to pay for it.
PS: Kahneman won the Nobel Prize in Economics for his Prospect Theory, which he talks about in his bestseller Thinking, Fast and Slow.
Article by Aleix Garcia – Managing Partner at Infini Concepts
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