I'm groggy, tired, and in dire need of coffee. It's time to make the first decision of the day:
Should I make coffee at home or buy a coffee?
As I'm weighing my two options, my phone lights up with a notification -- it's from Starbucks.
Limited time! Purchase a beverage and get a free pastry.
Oh boy! Here's where the justification process kicks in. If I buy a coffee now, I'll also get free breakfast. That's too good of an offer to pass up.
I open the Starbucks app and look at the number of rewards points I have. There's not enough for a free coffee now, but I only need a few more. I'm almost there.
If I buy now, not only will I have coffee and breakfast, but I'll also be immediately rewarded with points toward a free beverage.
Starbucks has mastered hyperbolic discounting.
So, what is hyperbolic discounting? And how can you use it to sell more?
Hyperbolic discounting is a psychological bias where people to prioritize immediate rewards and satisfaction over future rewards. It's used in sales and marketing to encourage consumers to purchase based on the short-term reward, or instant gratification.
A psychological bias, or cognitive bias, is defined as, "the tendency to make decisions or take action in an illogical way."
In the case of hyperbolic discounting, this means that even if a reward in the future is better or more valuable than an immediate reward, people are more likely to choose the short-term reward anyways due to psychological bias.
Hyperbolic Discounting Example
Free shipping deals are a perfect example of hyperbolic discounting: "If you buy more than $50, you get free shipping." If the buyer only has $35 in their cart, they're compelled to continue shopping to earn the deal. In essence, cognitive bias prefers the immediate reward (justifying a larger purchase with free shipping) over being patient and waiting for a larger reward (having more money in your bank account and making another purchase when budget allows).
Ready to see what hyperbolic discounting looks like in action?
The clothing store, Everlane, is known for: Exceptional quality. Ethical factories. Radical Transparency. And it's an example of a business that uses hyperbolic discounting.
It has an e-commerce sales method called Afterpay, where customers can buy now and pay later. They pay a portion of the balance up front and the rest is paid in quarterly installments.
Purchasing a new wardrobe is expensive, and for consumers, Afterpay allows them to delay the financial burden. They get the immediate reward of purchasing the items they want, without having to pay the entire cost up front.
Everlane benefits from this because the customer purchases more than what they originally budgeted for.
By providing multiple opportunities for smaller discounts, the effect of this compounds over time and impacts revenue in a positive way.
Hyperbolic Discounting in Marketing and Sales
Here are some ways you can use hyperbolic discounting when selling products or services.
1. Loyalty Programs and Point Systems
How do loyalty programs and point systems work?
They're rewards programs offered by companies to customers who frequently make purchases. Loyalty programs often give customers free merchandise, rewards, coupons, or even advance released products.
These rewards incentivize your customers to purchase from you. And smaller, short-term rewards play into consumers' psychological bias and gives them the instant gratification they're looking for.
As an added bonus, loyalty programs increase the likelihood people will recommend your product or service. In fact, 70% of consumers would be more likely to recommend a brand with a good loyalty program.
If we apply this to Starbucks, it means the company has 16 million members who will recommend Starbucks and its rewards program to other people: their family, friends, roommates, and co-workers.
2. Limited Time Offers
If you saw this in your inbox, would you be compelled to click?
Limited time offers create a sense of urgency for the consumer. It makes them think, "If I don't buy now, the price will never be this low again. I'll have missed a great opportunity."
Oftentimes, they'll buy the product on the spot, choosing the short-term reward. Examples of limited time offers include:
- [Product name] is back, for a limited time only
- Last chance! Save $25 on [product name]
- Flash sale! X% off [product name]
- Only hours left for savings on [product name]
3. Delay Payment
Do you have a credit card? If so, you're likely familiar with delaying payments.
It's easy to slip into the "buy now, pay later" mindset. And it only takes a swipe of your credit card to get the immediate satisfaction from purchasing a product you want. And many companies like J. Crew, Kohl's, and Amazon have credit card programs.
Another simple way to implement a "delay payment" option is to allow customers to buy the product and pay for it with incremental payments.
People who delay payment are interested in the short-term reward of purchasing the product when they want it. The almost immediate satisfaction they get from buying the product outweighs the financial cost they need to address in the future.
Hyperbolic discounting over time can lead to increased sales, so you should include it in your arsenal of pricing and selling strategies.
Editor's note: This post was originally published in May 2019 and has been updated for comprehensiveness.