Are discounts just a well planned trap?

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Are discounts just a trap - I See IndiaI remember the day my first desktop was bought. When I had asked the shop owner for freebies with the PC, he had retorted with “There ain’t no such thing as a free lunch (well, actually the Hindi version of it). Maybe he was just highly influenced by Milton Friedman’s book or was speaking out of his experience. Whatever the case, that’s the day this popular phrase in economics introduced itself to me.

The origin of the phrase, which means that you can’t have something for nothing, can be traced back to 1800s when many saloons in the United States provided a “free” lunch to patrons who had purchased at least one drink. Since most of the food offered would be high in salt,those who ate them ended up buying a lot of beer, making the “free lunch” a much more costlier affair. The phrase is popularly used in economics to describe the opportunity cost of making a decision i.e how the decision to consume one product usually comes with the tradeoff of foregoing the consumption of something else.( Say, if you had to choose between A and B and you choose B, the opportunity cost refers to the benefits you could have had with choice A and which you lost by opting for B.) It is often acronymed to TANSTAAFL.

Ever since the great debacle of Flipkart’s Big Billion Sale, I have been thinking a lot about discounts and whether TANSTAAFL can be used to explain how retailers pull off discounts or are they actually win-win for both sellers and buyers?

To unveil the answer, let’s explore the different scenarios in which discounts persist.

Price Discrimination : Sellers sometimes offer the same product at different prices to different segments of the population because they realize the difference in the purchasing capacity across customers. Consider student discounts at a restaurant. When students are given discounts, it doesn’t mean that other customers are charged more. This tactic is simply employed to expand customer base by attracting more customers who would otherwise be unwilling to pay for the product or service.

The Mind Games: There is a popular story that economist Cialdini talks about in one of his papers on consumer behaviour. It goes like:

..the Drubeck brothers, Sid and Harry, who owned a menís tailor shop in the 1930s. Whenever Sid had a new customer trying on suits in front of the shop’s three-sided mirror, he would admit to a hearing problem and repeatedly request that the man speak more loudly to him. Once the customer had found a suit he liked and asked for the price, Sid would call to his brother, the head tailor, at the back of the room, “Harry, how much for this suit?” Looking up from his work – and greatly exaggerating the suit’s true price – Harry would call back, “For that beautiful, all wool suit, forty-two dollars.” Pretending not to have heard and cupping his hand to his ear, Sid would ask again. Once more Harry would reply, “Forty-two dollars.” At this point, Sid would turn to the customer and report, “He says twenty-two dollars.” Many a man would hurry to buy the suit and scramble out of the shop with his […] bargain before poor Sid discovered the “mistake”.

While this might just be a fictional story, few sellers actually play similar mind games with their customers.

Say you see a jacket priced at Rs. 2500, but you ignore it. Now, if you see the same jacket at Rs. 2500 but this time with a label of “50% off previous price” , you jump at the ‘irresistible’ offer. Though the absolute price was the same in both cases, why did you respond to the latter case? Because that’s how our brain works. When we perceive a relative bargain, we are attracted towards it. The idea of getting something at a lesser price appeals to us more than the price itself.

Let’s consider another example. You are at a supermarket and see one tea brand with ‘75% extra’ on its label and other with ‘33%off’. Studies suggest that more people would choose the 75% extra even when the other might mathematically be a better deal. Why? Because we are out on shopping and our brain doesn’t want to do that extra work of calculating relative profit. It simply responds to the higher number, 75 in this case.

There’s another trick that neuromarketers employ to use discounts to actually make consumers pay more – by using the force of the reference price.

Let’s take a magazine subscription offer. Quite often it goes like this:

Online Copy : Rs. 500                     Print: Rs. 1000                  Print and online access : Rs. 1000

Which one would you opt for? Yes you guessed it right. Maximum people go for the last one. Normally we would have gone for the least expensive one. But when we see we can get two things at the price of one, the ‘I’m getting a better deal’ syndrome kicks in and you do exactly what the marketing guys wanted you to – spend more. The second option, as Dan Ariely calls, is simply a decoy that draws our attention to the relative advantage of the third option over the second.

The discussion on discounts will be incomplete if we don’t talk about the oldest retailer trick – increasing the pre-discount marked price and then offering a discount to sell it at the same or even higher price. But why does this work? Because let’s just admit it, we all love discounts. The mere idea of getting something at a discount lures us into buying it.

I’m not touching upon how “FREE!” messes up our rational thinking, because I think by now you get the point of how neuromarketing works.

Conclusion

Discount pricing has only one intention – increasing sales, but definitely not at the cost of profits. So yes, TANSTAAFL of course applies. But the customer might not be paying the additional price by ending up as the net looser. He might be subject to clever marketing strategies that exploit irrational human behavior, but that doesn’t always translate to being cheated. The customer wins when he thinks rationally. So the next time you see a discount, just take a moment to reflect and see if the bargain is just your perception or a real one.

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