When is a discount not a discount?

Either our maths is not that good, or we don't invest mental effort in thinking about small transactions.

It is a universal truth that either our mental maths is not that good, or we do not invest effort in thinking about small transactions. Either way, we pay for mental laziness!

We have all seen those discount loyalty cards: get ten stamps and your next coffee is free. “Great”, we think, “a 10% discount on the cost of our coffee!”

Wrong. The first error we make is straight maths: we get one free coffee in every eleven, so that is a 9% discount not 10%. 

So am I just being pedantic? Yes, but this only works precisely on that 11th coffee. Up to and including ten, there is no discount. Once you hit the sixteenth, for example, it’s only 6% and decreasing until you hit the 22nd.

And you might retort “Yes, but the loyalty card is free and the coffee shop is the most convenient. I would buy from there even if there was no discount!”

Fair point. However, in some cases we pay for that loyalty card – either in the form of a season ticket or in the form of a specific program for gym membership.

When you’re paying for the discount, then another factor comes into play. Not only do we overestimate the size of the discount in the first place, but we also overestimate the amount we will use the service or product. This second factor is particularly relevant when considering activities that are virtuous, such as gym visits or educational pastimes such as classes.

So we have purchased a season ticket for a discount that is actually lower than we have calculated it to be, and we will not use the ticket anywhere near as much as we estimated!

Pricing gem:

Discount or loyalty cards not only aim for higher volume, but in some cases, their use can drive higher prices.

More pricing gems...