What is Hyperbolic Discounting? How Marketers using "Instant Gratification" as a tool?

How about one more episode of Brooklyn 99 (or Lucifer?) on Netflix? one more plate of butter chicken? one more pint of Heineken? one more Marlboro?

These are the question we ask ourselves & knowingly end up making bad life choices.

But why do we do such things?

The answer is "Instant Gratification" which releases a cocktail of endorphins, dopamine, and serotonin hormones or in other words "Happiness".

This phenomenon has coined by psychologist Richard Herrnstein as Hyperbolic discounting. Hyperbolic discounting is a cognitive bias, where people choose smaller, immediate rewards rather than larger, later rewards — and this occurs more when the delay is closer to the present than the future.

People generally want rewards sooner rather than later. Thus, options that delay a reward appear less attractive and people discount them.

If we give you 100 Rs. today or 120 Rs. next week, which the option will you choose?

It is very likely that you will take 100 Rs. It is not just you; most of us will choose the first option.

Now, let us tweak the timeline; what if we give you 100 Rs. after a year or 120 Rs. after a year & a week.

Chances are high that in this case, you will choose the second option.

(Image 1: Time delay makes our choices rational)

What has changed? Although the time difference in both cases is the same, we choose differently.

(Image 2: Time delay makes discounting less attractive)

Reward realization drops steeply as we move away from “NOW”. We consider instant as a premium & ready to pay more (here scarifies more).

When we were animals, we valued today’s food, today’s comfort, today’s pleasure because in such times there was no future safety. Now, we have a moderate level of food & accommodation safety but still, our primal nature is taking the charge in decision making.

Our brains are wired for “Instant” & “Now”. Neuroscientists have discovered that our brains light up like a Diwali night when we get stimulated by the power of instant gratification. The brain uses hyperbolic discounting as a learning mechanism. The basal ganglia contain a responsive portion that learns by receiving immediate reward-based feedback.

(Image 3: Basal Ganglia activated for instant gratification in MRI Image)

That’s enough theory, now let’s move to the marketing side of Hyperbolic Discounting.

How companies take advantage of this primal cognitive bias?

The strategy is to create a perception of Immediacy: They know consumers value “Right Now”. This psychological (Primal) instinct of instant gratification is the building block of companies' Go-to-marketing strategy.

Below are the tactics to achieve the above-mentioned strategy:

Tactic 1: No-cost EMIs by Ecommerce

The Idea of not paying now + no interests kick dopamine in consumers. When such a situation comes, we simply feel the urge to take it; we overlook the need; we overlook the price; we overlook our ability to afford it; we overlook the utility of the purchase. Marketers simply short-circuit the entire cognitive process & bring us right next to purchase decision.

As a consumer, you don’t care about the pricing as long as you don’t have to pay now. Still wondering why eCommerce giants brought this benevolent No-cost EMI plans; they are no saints & we shouldn’t be making the mistake of thinking them otherwise.

(Image 4: Amazon mobile page banner of Samsung Galaxy M51 with No-cost EMI)

Tactic 2: Welcome Bonus (First Order Discount)

In Hyperbolic Discounting, timing is everything that’s why it is known as Temporal Discounting. Consumers act willingly if they are rewarded immediately. The entire sales funnel is created to reward in exchange for purchase (sometimes actions).

(Image 5: Rummycircle website. See the 2000 Rs. signing bonus upon registration)

Take an example of Rummycircle, a game based on Rummy, a popular game in India played using cards, which gives 2000 Rs. (amount varies on platforms e.g. on the smartphone they may give 1500, on tab 2000, on iPhone 1000, etc.) as a signing bonus. Here the immediate reward of Rs. 2000 entices a consumer to sign-up for the game. Of course, the reward is non-redeemable, but consumers are happy to have a virtual currency they can play with.

The second example is of Myntra where you will get Rs. 300 off + Free shipping. This will tempt the user to sign-up & do their first purchase. The caveat is that a user must make a minimum purchase of Rs. 1200 (this keeps on changing but remains in 1Ks) to get the above two benefits.

(Image 6: Myntra.com sign-up page giving 300 Rs off + Free Shipping)

Tactic 3: Cashbacks (also loyalty points & scratch cards)

Remember the good old days when Google-pay scratch actually gives you surprises? Or if you are an early user of CRED, you must have got unbelievable offers.

That is the magic of cashback, if humans are always rational then cashback shouldn’t excite them & it should be treated as a reduction in price. But it gives us more plea sure to spend Rs. 100 & get Rs. 10 back rather than directly spending Rs. 90

Paytm made the word cashback ubiquitous in India. Companies use the cashback to keep us hooked on their platform. Similar tactics have been used by PhonePe, Amazon Pay, Mobikwik, etc

(Image 7: Paytm.com homepage banner ad offering 100% cashback)

Tactic 4: Free Trials

User Free trials make acquisitions easy for the marketers and give them a chance to showcase their product’s capability to target group. On the other hand, customers are happy to try it, they feel the power of well-tested decision making. In a way, it looks like a win-win situation.

But where is the Hyperbolic Discounting Caveat here?

Before we reveal the caveat, first let us understand the basic difference between product vs. service-based industry. In a product-based industry (e.g. Parle G), you buy a product, you consume a product, you aren’t making any contract here; while in a service-based industry (e.g. telecom or LinkedIn), you get acquired by the company by giving deep discounts or free trials, once you get in their eco-system, they will try to sell their products & make a profit out of it.

Let’s get back to caveat. When you registered for a free trial on Netflix or LinkedIn, remember entering your credit card details?

That’s you not thinking about future costs & making a bad decision on present benefits.

(Image 8: Netflix.com communicating their customer centricity by 3-day reminder)

Netflix Free trails made explosive growth in India. It propels Netflix from a meager 4% player in 2016 to becoming a Numero Uno player with a 20% Market share today.

LinkedIn is no saint when it comes to utilizing your weakness for instant gratification with the free trial.

LinkedIn is probably the only social media player that succeeded in monetizing from subscribers. It uses a cocktail of Hyperbolic Discounting and Fear of Missing out (FOMO).

When we see the world around us loaded with advertisement, offers & enticement; won't it make you feel yourself like a lab-rat getting experimented by marketers. We will see it every day, how marketers trying to entice us every day with new tactics with the same core strategy of instant gratification.

For a second forget about the marketing side of the hyperbolic discounting, in life we make decisions that provide us with instant gratification by relinquishing meaningful things. Remember how we all have taken gym membership but traded health to get the gratification of comfort.

Hyperbolic discounting was relevant for our great-great-great ancestors who were fighting for a piece of meat but it is not relevant for us, we are not the generation of "Now" & the sooner we shield ourselves from its involuntary action, the better our lives will become.

Article by: Gunjan Solanki

Author is the founder of Marketing Weekly. He is an Alumnus of IIFT, Kolkata.

He is currently working in Sales & Distribution for Pidilite Industries. He has prior experience in Sales, Marketing, B2B in Vodafone & Trident Group.