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Anatomy of a shopping discount

Having a sale every day is a bad idea, but retailers are afraid to stop.
– Rama Ramakrishnan, former chief scientist of Oracle Retail

Why are there shopping discounts? Would not it be much simpler to find what you need, and just buy it at the lowest price in the market? Instead we are bombarded with marketing tricks called “shopping discounts” that turn our decision making into a nightmare. I have recently read a wonderful book called Cheap: The High Cost of Discount Culture where the author, Ellen Shell, offers her opinion on what exactly drives us to buy things and what role discounts play in our culture. In this blog post I would like to share some of her thoughts as well as add my own take on the subject.

The illusion of a price

The survival strategies of our ancient ancestors did not include learning the art of assigning monetary values to things. Barter, not money, was essential part of the ancient lifestyle for a very long time. Money as the concept is nothing but a small speck in the history of humankind and naturally people have not had the time to develop the proper skill. Monetary values are abstract, highly variable, and vulnerable to the power of suggestion and manipulation: People will pay more or less for the same thing depending on the context of the transaction.

Duke University professor Daniel Ariely — an economist and author of Predictably Irrational – once set an experiment in which he offered to recite his students a poem. Half the students were asked whether they would pay $2 for the pleasure of hearing him read, while the other half were asked if they would be willing to listen if they were paid $2. Then both sets of students were asked whether they would attend the recitation if it were free. Only 8% of the students who were offered money were willing to attend the performance without pay, compared with 35% of the students who were originally asked to pay to hear it. As you can see the “framing” of the event clearly influenced its perceived value.

The real-life example is outlet malls. Remote location of outlet malls is not merely a defensive, cost-saving maneuver directed to cut costs by taking advantage of low real estate prices and tax benefits. It is also a deliberate strategy. In the public mind, convenience is a trade-off for price, and price is traded off for convenience. Inconvenience connotes cheap, while convenience connotes pricy.

The pressure of a discount

Shopping is not a rational exercise but a process fraught with emotions raging from guilt to jubilation. Shopping forces us to extrapolate future needs from current evidence, a surprisingly difficult task. How do we really know what we will want or need tomorrow, let alone a month from now? The main problem is that shopping is for later, but for humans the “here” and “now” is always more important.

Thanks to what psychologists call Hyperbolic Discounting, humans are able to think rationally when a reward is significantly delayed. But as the reward gets closer, our passions lead us to fits of impulsiveness. This is not a terrible deep insight: Everyone knows that it’s easy to make resolutions for the future but far harder to put those resolutions into immediate practice.

Retailers can take advantage of this by offering “exploding discounts,” price reductions rigged like an arbitrary time bomb. Exploding discounts work by really heightening the emotions, whether you need it or not, the time limit itself gives you a reason to act now. The emotional response is “Buy it now, or it will be gone”. You are focusing on the present, not the future, and that’s where they want you to focus, because we are all much more emotional about the present and more rational about the future.

Different discount flavors

In addition to a direct reduction of price, discounts come in a couple more flavors, each designed to elicit a different consumer response: coupons and mail-in rebates. Coupons are less dangerous for retailers than direct discounts. Someone has to physically cut it out and bring the coupon to the store, and not everyone is willing to do that. Coupons are a way of having two prices: a price-sensitive person will use the coupon and get a lower price, while a less price sensitive person might be willing to pay the full price.

Rebates do something similar using a very different strategy. The catch is that no matter how much we enjoy the idea of rebates and account for them in our buying calculus, few of us enjoy filling for rebates. Rebate redemption rates are very low, hovering in the 5 to 10 percent range for many items.

Discounts can hurt businesses’ bottom line but retailers employ numerous marketing tricks to maximize profits and negate the discount effects. For example at McDonard’s and many other fast-food restaurants, the lighting tends to be unflattering fluorescent, and the seats are bolted to the floor at an awkward distance from the tables. The purpose of this is not to prevent theft of the chairs, as you may think, but to discourage elders, teenagers, and other undesirables from getting comfortable and congregating for hours over a small coffee, or an order of fries.

Time is money (freebies)

Free is a category unto itself, It can rob us of our reason. Razor blade maker King Camp Gillette took full advantage of this temporary insanity. Gillette grew rich handing out free safety razors to generate demand for his pricey disposable blades. The business model was later called Freebie Marketing and expanded into many more areas of our life ranging from entertainment to household items to office equipment.

How do freebies work? Very low prices tend to make us overvalue the deal. This is a boon for merchants who know that as their price approaches zero, consumers tend to lower their expectations and become more willing to endure significant costs, generally the highest cost being their time. We all know that time is money but research shows that most of us fail to calculate the opportunity cost of time, and when reminded of it, we tend to underestimate its value.

Conclusion

Discounts may be calibrated mathematically, but their impact is felt viscerally and deeply. As do sex, alcohol, and drugs, discounts tap into our brain’s pleasure center and sap our reason. Distracted, we make mistakes. We overvalue what we say matters very little, such as saving a few pennies and undervalue what we say matters very much, variety, quality and - most important - our time. Understanding the “magic” discounts work on our brains is important for coming up with an effective strategy to help us counteract the problem – something that will probably be a topic of one of my future blog posts.


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2 Responses to “Anatomy of a shopping discount”


  1. 1 bmommy Jul 28th, 2009 at 7:36 am

    Thank you for such an absolutely wonderful, well-written, and informative article!

    I think it’s so fascinating how our mind can be tricked into behaving illogically because someone can impose a sense of urgency upon us. I have had a lifelong vow to NOT make an important decision, financial or otherwise, without sleeping on it. This especially applies to major purchases. I don’t care how attractive the offer or how urgent the situation is (”limited time offer,” or “limited stock available,” etc.)I have learned that I absolutely MUST remove myself from the situation, clear my head, and sleep on it before making a major purchase. In most of those cases, the frenzy subsides and I am able to think calmly and rationally, deciding AGAINST the purchase.

    This can be even more challenging when my spouse or shopping partner is panicking about the offer expiring or selling out and attempting to convince me to move forward with the purchase. On the occasions that I have succumbed to the pressure, either internally from myself or externally from others, I have almost always regretted my haste.

    Oh, and on a lighter note, the unintentional wording from above really made me laugh: “to discourage elders, teenagers, and other UNDESIRABLES from getting comfortable and congregating for hours over a small coffee, or an order of fries.” LOL….with the word “other” in there, it makes it sound like elderly people and teenagers are considered “undesirables!” gave me a chuckle.

    Again, thanks for a great article. Very interesting and provocative.

  2. 2 Ben Hebert Aug 4th, 2009 at 1:03 pm

    I can’t tell you how many times I have been at the store and looked at sales and thought, “Hey that’s not really a bargain at all.” Most recently this event can be related to when Circuit City went bankrupt and all of their product was to be liquidated.

    I had been shopping for a HDTV for quite some time and been in the store a couple of times checking out the specs as well as prices. For me personally I just can’t jump right in and purchase something without finding the best deal possible.

    Anyway, after the notice of this “mega blowout liquidation sale” I went into Circuit City and actually found out that they raised the prices on select items but countered it with a Percentage discount. This means they weren’t really offering anyone any savings at all!

    Now I work for http://www.giftcardrescue.com and what we do is specialize in buying gift cards and reselling them. There is a discounted price but what you see is what you get and there aren’t any tricks or gimmicks like those in your article.

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