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Is that discount a good deal?

Most people like shopping & almost everybody loves it during the sale season. Simply because you assume that you are getting a great deal at a low cost.

business Updated: Jul 27, 2012 22:38 IST
Vivina Vishwanathan

Are you one of those who save money round the year to shop to your satisfaction during the sale season? In that case, you would be familiar with the various types of offers available: buy one get one free, buy two get two free, up to 40% discount, 33% extra for the same price and so on. But do you understand what these offers really mean and how good a bargain are they for you? If you want to know more, read on.

Assumption

Most people like shopping and almost everybody loves it during the sale season. Why is it so? Simply because you assume that you are getting a great deal at a low cost.

“It is an assumption that because something is on sale it implies that it is a good deal,” said Akshay Rao, who holds the general mills chair in marketing at the Carlson School of Management, University of Minnesota. “So if the retailer says a certain product was $100 and now you will have to pay $80, consumers anchor on the original price and assume that they are saving $20. So retailers have an incentive by suggesting a high, but credible, reference price.” Assumption usually plays a major role in our buying decisions during sale.

Free, free, free http://www.hindustantimes.com/Images/Popup/2012/7/28-07-12-biz-04.jpg

“Buy one get one free” or “buy three get one free”. Each one of us at some point of time must have flocked at the counters that shout the word “free”.

Why does the word “free” attract us? Dan Ariely, professor of psychology and behavioural economics, writes in his book, Predictably Irrational, “Most transactions have an upside and a downside, but when something is free we forget the downside.” The word “free” acts on us in a way that we think what is being offered is more valuable than it really is. Since there is no visible possibility of loss when we choose a free item, we opt for it. So given a choice between an item that is “free” and another one for which you have to pay, we prefer the former even if it means a bad decision.

Now, how does it lead to a bad decision? “Imagine A costs one penny and B costs a dollar and a penny,” said Ariely. “Here assume B is a better product quality-wise and the difference is worth a dollar. So you will think that item B has more value and is better in quality. But if A comes free of cost, you won’t even think twice before picking up A. Imagine that you are offered a free ice cream but to get it you will need to stand in a queue. Here you may think that you are getting it for free. But it still costs you a lot more. For instance, the waiting cost and the cost of letting go something more valuable.”

Double discounting

Imagine the store that you walked into has two offers in the shirts section — the first offers 20% off plus an additional 25% off and the second has a flat 40% off. People are more likely to see a better bargain in double discounting. However, a back-of-the-envelope calculation shows that in both the above offers, you get the same discount of 40%.

According to a research paper, When More Is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs over Price Discounts, authored by Rao and his team, consumers neglect base values when processing percentage change. Consumers feel the double discount of 20% off plus an additional 25% off is better than the economically equivalent single discount of 40% because 20 plus 25 is clearly greater than 40.

Tip: It is always better to opt for plain vanilla discounts than the complicated ones.

Context effect

Assume you walk into a branded store to pick a belt and after scrolling through the belts counter, you realise that there are belts priced at R1,299 and R699. Chances are that you will go for the one that costs R699. This is because any product featured next to a higher priced product will appear to be cheaper and a better deal. But if you evaluate each by themselves, it may not be as good a deal as it looks. This is called context effect.

Retailers often use this strategy to display cheap stuff in the rack closer to the expensive one. Here the strategy is to place a high price decoy next to overpriced products the vendor wants people to buy. And consumers often fall for the trick.

Same number effect

Did you know that a 33% discount is better than getting 33% extra free? However, Rao’s team, through a survey, found that bonus packs were preferred to price discounts. Human are generally not able to differentiate between two different offers with the same number. The team also found that most respondents thought the deals were equivalent, which was not true.

Studies have found that even well educated shoppers are bluffed due to numerical blindness. It is not very difficult to make the right decision. But for this the most important thing is to make a conscious buying decision. If you are one of those who want to shop only during the discount season, then it would be economical to do the math beforehand.