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Why Hyperbolic Discounting Matters in Ecommerce

Is sooner really better than later?

Plenty of hit songs have articulated the problem of choosing between now or nevernow and latersooner or later… you get the idea.

This common dilemma can also apply to ecommerce marketing—especially when it relates to the psychology behind how customers think.

You’ve undoubtedly seen deals for refrigerators, home theatres, and even mattresses that encourage you to purchase a product now, without having to pay for it until a later date. Not surprisingly, this trade-off between getting something immediately and not having to worry about it until later is a huge attraction for many customers.

There’s an entire psychological principle that encompasses this very idea: hyperbolic discounting. Although you’re more likely to hear about this type of cognitive bias in an economics class than in a marketing setting, there are some key takeaways for ecommerce marketing today. With a greater understanding of this psychological concept, you can get to know your current customers better and market to future buyers more strategically.

Understanding hyperbolic discounting

What is hyperbolic discounting exactly? It’s a type of cognitive bias that makes our brains prioritize more immediate rewards over those that might come our way in the distant future.

Let’s say you were offered the choice between receiving $50 as an immediate reward, or getting $100 in a year. “Of course I’d be smart enough to take the later reward!” you might think to yourself. But as two landmark studies revealed, most people would still choose the smaller amount. Why? Blame it on your brain! For many people, the year-long time delay diminishes the perceived present value of the extra $50.

Cognitive biases like hyperbolic discounting aren’t easy to do away with, either. Irrational as they might seem, many are practically ingrained into our brains. Even the most logical person will fall victim to the cognitive bias that almost always values an immediate reward over a long-term one, even if it’s a more attractive offer.

Our brains tend to be on autopilot when instant gratification is on the table. All we know is what we want and that we want it now, regardless of the irrationality or consequences of our decision (remember Veruca Salt in Willy Wonka?).

But while most people fall victim to hyperbolic discounting, a small group of people will still hold out for the larger reward, also known as present bias. Also, since hyperbolic discounting creates decision-making factors based on immediate rewards, it often leaves people with preference reversal further down the road, which means their future selves will wish they had waited for the later reward.

How hyperbolic discounting applies to B2C marketers

Whew! You might be thinking that’s a lot of psychology for a marketing blog post. But in ecommerce, the mentality that drives hyperbolic discounting is pervasive: We don’t like the concept of delayed gratification as consumers or as marketers. And we use that to our advantage to better sell to our customers.

That’s one of the reasons why we use urgency when writing ad copy. It’s also why we create product pricing plans that play up the benefits of the here and now. Whether you’re offering a free month of service or giving customers the option to pay less over the course of a period of time, your brand will seem more appealing in customers’ minds.

Hyperbolic discounting really comes into play when shoppers are faced with a slew of options. Should they spend now or save later? Should they act while there’s a discount, or hold out till a better one comes around in the future? Should they choose a pricing plan that gives them the option to spread out their credit card payments for months?

hyperbolic discounting

A great example of this is subscription box services, which lean into the concept of hyperbolic discounting. Whether they’re delivering food, wine, or curated clothing selections to your doorstep every month, these brands center their entire marketing strategies around providing you rewards right now in the present time, as well as in the future. Really, the whole value of subscription boxes is that you always have an exciting new product to anticipate. It’s a smart way to satisfy both the instant needs customers have, while also creating valuable recurring revenue for your brand.

Case in point: Stitchfix puts together stylist picks for their customers every month so they know what to be on the lookout for—and what to be excited about—in their next box. That way, customers are always looking forward to their next shipment (and getting their “future reward” fix) while still being able to enjoy their current box for that month.

Use hyperbolic discounting to your advantage

As a B2C marketer, it’s vital to understand hyperbolic discounting since it can have a huge impact on whether your customers buy and what price they’re willing to pay.

As we’ve seen, most customers want to know how your brand can instantly meet their needs. You can use this knowledge of how they make decisions (and in some cases, how they might lack self-control) to integrate into your marketing campaigns. Any time you can provide that feeling of instant gratification they’re looking for, it’s a big win.

Here are just a few ways you can use the immediate payoffs and delayed rewards of hyperbolic discounting in your marketing strategy.

Instant access

Consider allowing your customers to experience your product first-hand as soon as they show interest, either by way of a free trial or a free sample. You can also include a bonus on top of their purchase to increase their excitement—a well-placed discount or small gift are both great incentives.

When Amazon gives you access to the digital album of a vinyl you just bought, it’s all in the service of instant gratification. Similarly, if you’ve recently purchased a Blu-ray or DVD (remember those?), you might have received a special code to obtain the digital version, as well.

hyperbolic discounting

Loyalty programs

If you’re enrolled in any type of loyalty program, you know that part of the appeal is racking up enough points to exchange for a future reward at a later date.

But do most customers patiently sit on those points with the hopes that they’ll one day reach an often unattainable goal (although maybe spending $1,000 on makeup each year is reasonable for some people)? Or do they use those points as soon as they hit smaller landmarks for more immediate rewards?

Knowing what we’ve seen about how cognitive bias works on our brains, it’s likely that it ends up being the latter. Building your loyalty program around these smaller rewards and more attainable goals is a smart way to encourage engagement and give your customers that instant gratification they crave.

Try-at-home

For bigger purchases that might be viewed as high-risk, more and more companies are letting customers try before they buy, or take the product home for an extended test run and return it for free if they’re not satisfied.

hyperbolic discounting

From Warby Parker to Casper to Wayfair, brands are using elements of hyperbolic discounting to give customers what they want now, instead of making them toil over their decision while wondering if they’ll even like the product in the end. And here’s the kicker: Most people are reluctant to return products under this system because of how much work it takes.

For most ecommerce shoppers, cognitive bias will factor into their decision-making process, and short-term happiness will probably end up winning out. But knowing how psychological science relates to hyperbolic discounting will bring clarity to your marketing, especially as you think about who your target customers are and how to market to them.

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