For a Limited Time Only—Deep Hyperbolic Discounts

Me: I’ll take “The Stone Age” for 400, Alex.

Alex Trebek: 401(k)s, eldercare costs, eating heart healthy, and finishing an end-of-year term paper.

Me: (Boop, boop, boop) What are things cavemen never thought about?

Alex Trebeck: That is correct.

401(k)s were invented in 1981, so obviously cavemen would never have been thinking about them, but the point I want to make here is larger. For the 2.8 million years that our genus, Homo, has been around, not much of it was spent planning far into the future. The first evidence found of humans storing food for later consumption was 400,000 years ago. For most of human evolution, we were thinking about our immediate needs. Our brains developed in a world of only “right now.” There was a survival advantage to favoring the present. Standing around day-dreaming about the future put you at risk of getting picked off by saber-toothed cats.

We are no longer living in that world, but our brains have not had time to catch up. Most of the cognitive biases we have are a result of us evolving during a time that favored quick thinking to survive the present. Cognitive biases arise from relying on heuristics—mental shortcuts that allow us to make a decision right away.

It’s this focus on the present that’s responsible for the bias we’re focusing on this week—the hyperbolic discounting bias.

GORK, DO YOU WANT HALF A WOOLY MAMMOTH NOW OR A WHOLE WOOLY MAMMOTH NEXT WEEK?

The “discounting” in the term “hyperbolic discounting” does not refer to a monetary discount, but rather our discounting of rewards or costs that occur farther in the future. In other words, in our brains, $10 now sounds better than $15 next week. We will procrastinate on a task because doing something tedious right now sounds much worse than doing it in the future. Hyperbolic discounting is our tendency to choose immediate rewards over future rewards, even when the future rewards are greater.

The ”hyperbolic” part of the term comes from the shape of the graph charting how much we discount the future over time. Studies show that while most people would choose $10 now over $15 next week, those same people would choose $15 in five weeks over $10 in four weeks. Today vs. next week? We put much more value on today. But four weeks from now vs. five? We put a little more value on being paid sooner, but not that much. We’re not quite as distracted by the shiny NOW. We realize that, rationally, it would be better to wait for the larger monetary value. Our valuation of the future declines much more steeply in the short term.

I HAVE A VENTI ICED CARAMEL MACCHIATO WITH ALMOND MILK FOR GORK

You’re at a startup, or maybe a B2B SaaS company—we get it. You can’t be Starbucks and offer instant loyalty rewards in the form of lattes. But you can use hyperbolic discounting in your favor.

• Buy Now, Pay Later
  Yes, it sounds like a sign you would see at Rooms To Go, but “buy now, pay later” can work for you as well. You can have the full $30,000 version of the software right now, but you only have to pay $10,000 up front.
  
• Discount the First Few Months
  Since we care about costs right now more than later costs, offering a discounted price for the first few months of a service can be an effective strategy. Our service costs $250 per month, but if you buy now, you’ll get your first three months for $150 per month.
  
• Free Trial
  Try our software for free for two weeks, then we’ll charge you monthly. This tactic also capitalizes on the ownership effect, another cognitive bias which causes us to value an object we own higher than one we don’t. Once we start using something and feel like it’s ours, it’s hard to give it up.
  
• Loyalty Programs
  Just because you don’t have a barista doesn’t mean you can’t have a loyalty program. If you join our loyalty program, you’ll automatically get 15% off your first 3 months of service (hyperbolic discounting). You’ll also get early access to new features and be able to help us with beta testing.
  
• For a Limited Time Only
  Time kills deals. We know that to be true. If you sign your contract before the end of the month, we can give you a 10% discount. This strategy makes use of hyperbolic discounting as well as the urgency bias (putting higher value on something we know is going away).

CONGRATULATIONS, GORK, YOU’RE EMPLOYEE OF THE MONTH

Your customers aren’t the only ones you can motivate with hyperbolic discounting. Even the best employees are still cavepeople at heart (or at brain). Does your organization have a recognition or rewards program? Research by Gallup and Workhuman found that employees who receive high-quality recognition are 45% less likely to have turned over two years later. How can you make your recognition program even stronger? Reward people sooner. Rather than recognizing hard-working employees once a year, think about doing so quarterly.

What about your compensation plans? Do people have to wait until the end of the year to get their bonuses? They’ll be less motivated than if they could achieve smaller bonuses more often throughout the year. A comp plan that’s designed with the human brain in mind can do wonders for employee motivation.

Are you managing a huge project? Break down your overall goals into manageable parts. Small accomplishments more often will motivate your team more than one big reward at the end.

When you think about it, it’s no wonder we didn’t get to 401(k)s until 1981. I’m surprised we have them at all. Why do I need a retirement fund in 20 years when I could have half a mammoth right now?

Reach out to mastery@maestrogroup.co to learn more about C2C (caveman to caveman) sales.