6 Ways to Capture the Magic of Hyperbolic Discounting

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6 Ways to Capture the Magic of Hyperbolic Discounting

05/12/2018 Blog 0

The term “animal spirits” brings a few things to mind.

It sounds like the name of a post-rock band that would put on a four-hour set in your friend Kyle’s basement. It also sounds like the name of the whiskey brand Kyle hopes to launch one day.

For our purposes, though, “animal spirits” is the term John Maynard Keynes used to describe the (often irrational) instincts that guide our behavior.

hyperbolic-discounting-keynes

The Santa Claus of economics.

Hyperbolic discounting is one of those instincts. And as complex as it sounds, this instinct is shockingly simple to understand and implement in your marketing strategy. Here’s how.

What is hyperbolic discounting?

Hyperbolic discounting is what psychologists call a cognitive bias. Basically, we’ll take a small reward today over a big reward next week. The key caveat is that our preference for the more immediate reward diminishes as it moves further away in time.

An example is useful here. Imagine that a genie has appeared and offered you a choice: you can come home to a plate of oatmeal raisin cookies tonight, or you can come home to two plates of oatmeal raisin cookies next Thursday night.

(Feel free to slander oatmeal raisin cookies in the comment section if you feel like being wrong today.)

Due to the principle of hyperbolic discounting, most people will select one plate of cookies tonight over two plates of cookies next week.

HOWEVA.

When presented with a choice between one plate of cookies in exactly one year or two plates of cookies in one year and one week, most people will opt for the latter. The time between the two rewards hasn’t changed, but our behavior has.

hyperbolic-discounting-discount-factor-graph

Via Neil Patel.

That’s the hyperbolism behind hyperbolic discounting. When both rewards are far away, the time gap doesn’t matter as much.

Why is hyperbolic discounting important?

Because you can drive more conversions by incorporating it into your marketing strategy.

Immediacy is key. When writing your ad copy, building your landing pages, and creating your pricing structure, focus on the value you can deliver to your prospects right now—or relatively soon, at least.

A quick reminder before we dive into the details: you must keep search intent in mind.

Although hyperbolic discounting is a cognitive bias we all share, many of your prospects are still far from converting. You can’t market to everyone as if they’re at the bottom of the funnel. If you do, you’ll miss tons of opportunities to build brand awareness and trust with the people who aren’t quite ready to buy.

hyperbolic-discounting-sales-funnel

Informational search queries—“what is PPC,” for example—come from people who are simply looking for information. It’s best to target these queries with your top-of-funnel material: blog posts, infographics, and so on. Offering an immediate reward (e.g., a free trial of your software) through a PPC ad to those who are only looking for information is a surefire way to reduce your CTRs and tank your Quality Scores.

Transactional search queries, on the other hand, tend to come from people who are ready to convert in some way. “PPC management software trial” clearly indicates that the searcher, having done some research, is eager to try something out. It’s principally with these queries that you can capitalize on hyperbolic discounting. Because your prospect has demonstrated interest in your product, it makes sense to put some kind of offer out there.

How can I incorporate hyperbolic discounting into my marketing strategy?

In a lot of diverse ways, actually. As I alluded to earlier, there’s room to cater to your prospects’ demand for immediate rewards in everything from Google Ads to your pricing page.

Let’s talk strategies.

1. Make a limited-time offer

A simple, well-established strategy? Sure.

A highly effective way to capitalize on hyperbolic discounting? Absolutely.

hyperbolic-discounting-walmart-offer

Via CrazyEgg.

According to Business2Community, an Experian report found that promotional emails “conveying a sense of urgency” drive 14% higher click-to-open rates, 59% higher transaction-to-click rates, and 100% higher transaction rates.

The lesson: urgency sells. Communicate to your prospects that right now is the time to purchase whatever you’re selling. A headline as simple as “Last Chance: Order Today for Free Shipping” is enough to activate the drive for immediacy.

2. Create a point system

I’m working on making all my own coffee at home. Considering how much money I can save, it’s kind of a no-brainer.

The main reason it’s so difficult: point systems.

Anyone else with the Starbucks app knows exactly what I’m talking about. When you buy coffee or food with the Starbucks app, you’re immediately rewarded with points.

hyperbolic-discounting-starbucks-mobile

Via Starbucks.

If we can speak honestly with each other (and I like to think we can), the euphoria I get from watching my points increase is almost as powerful as the caffeine.

And it makes it pretty much impossible for me to stop drinking Starbucks.

A system like this is perfect for ecommerce businesses. Entice your prospects by offering points for every item they purchase. Due to hyperbolic discounting, most people prefer the reward of points today over the reward of more money in their bank accounts in the future.

3. Offer free shipping for orders over X dollars

All online shoppers have been there.

You select the items you want, head to checkout, and realize that you’ve fallen just short of the order size required to qualify for free shipping.

Although it’s entirely irrational, I’ll always tack on one more item that I don’t really need to get the shipping costs knocked off my total price.

hyperbolic-discounting-free-shipping-orders-over-100-dollars

Why? Because I value the immediate satisfaction of not paying for shipping today over the delayed satisfaction of greater savings tomorrow.

By setting a total price at which your customers no longer need to pay for shipping, you offer to give them something today. If they’re anything like me (and they probably are), they’ll bite.

4. Allow prospects to delay payment

You’ve got it down at this point.

Hyperbolic discounting tells us that someone is more likely to convert if she’s allowed to delay payment. The reward of not paying today outweighs the reward of not having to pay at some point down the line.

This should sound familiar: it’s at the basis of credit card companies. In fact, some retailers take this strategy to the extreme of distributing their own credit cards. Kohl’s, Target, Costco, and TJX are only a few examples of stores that allow loyal customers to buy now and pay later.

hyperbolic-discounting-target-red-card

Via Credit Karma.

However, you certainly don’t need to institute your own credit system to implement delayed payment. Simply allowing customers to finance their purchases and complete payments incrementally is an effective way to maximize their net benefit today.

Plus, giving the reward of delayed payment allows you to bump up your price without losing potential customers.

5. Offer multiple pricing options

Subscription services are everywhere. Streaming music, watching TV, optimizing your paid search and social campaigns—it’s all paid for on a recurring basis.

If you sell your product or service through subscription—or if you’re thinking about getting in the game—you can capitalize on hyperbolic discounting through your pricing structure.

Let’s use Chegg as a case study. Branded as an all-in-one education solution, Chegg offers (among other things) an online tutoring service. Those interested in a weekly plan can cough up either $ 15/week for 30 minutes or $ 48/week for 120 minutes.

But, wait a minute. The first plan costs 50 cents per minute, and the second plan only costs 40 cents per minute. Why would anyone pay more money for less tutoring?

Because the first plan costs less up front. I’m a broken record at this point: people prefer the instant benefit of paying less today over the long-term benefit of saving money.

By the way, when you visit Chegg’s pricing page, the $ 15/week for 30 minutes plan is the only one that’s advertised. You have to click “View Additional Plans” to see the cheaper subscriptions. Sneaky!

hyperbolic-discounting-chegg-offer

Via Chegg.

6. Let prospects try your product at home

I’m in desperate need of new glasses.

For three years I’ve been wearing the ones currently on my face, and they’ve seen better days. They’re bent. They’re scratched. I honestly don’t think they even improve my vision anymore.

I don’t know when I’ll get around to fixing this exceedingly fixable problem. What I do know is that I’ll buy my new pair from Warby Parker.

The brilliance of the Warby Parker brand is simple: they let you try on five pairs of glasses before making your purchase. They understand that buying new frames is a big decision, and they tap into their prospects’ desire for instant gratification by offering an at-home free trial.

hyperbolic-discounting-at-home-try-on

Via Warby Parker.

When you give prospective customers that kind of freedom before they get into buying mode, you see a measurable boost in conversions. I buy from Warby Parker because they know how to make my life easier. They give me what I want now.

Think of it this way: a free, at-home trial allows your prospects to turn their homes into dressing rooms. It’s a simple step towards fusing the convenience of ecommerce with the immediate satisfaction of traditional shopping. And it works.

Give the people what they want now

Successful marketing is largely based on understanding how people think and behave. You can’t expect to sell anything if you don’t understand how and why people buy stuff in the first place.

Hyperbolic discounting is just another piece of that puzzle. It sounds complex. It isn’t.

Consumers want stuff now. That’s it.

That doesn’t mean every retailer has to offer a credit card or every ecommerce business has to halve their shipping time.

It does mean you can drive more conversions by finding ways to satisfy the consumer’s desire for a prompt solution. That will look different for every type of business and every type of marketing strategy. But the underlying principle is universal: give the people what they want, and, more importantly, give it to them now.

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