It is that time of the year again. Despite the pandemic, there will be a festive fervour around as India gears up for its biggest shopping season of the year. And sellers are at the ready with the most powerful weapon they have at their disposal - the sale event.
Why is the allure of a sale so hard to resist? Let's find out.
Strictly speaking, in a Homo Economicus kind of a way (that is to say you reason about costs and benefits logically), the worth of something that we don’t really want should be zero. So, ‘Sale’ signs shouldn’t matter that much. But they do.
That is because, despite how classical economic models treat rationality, our brain can be tricked into buying something being offered at a deep discount (regardless of whether the ‘need’ is strong) because of what behavioral economists term the ‘contrast effect’. Neuroscience research suggests that our brain’s medial prefrontal cortex – the decision center – lights up seeing a discount or a lower than expected price which is why we suddenly feel the urge to take advantage of that ‘deal’ even though it wasn’t the item we were exactly looking for. Retailers and e-tailers know it well and use it to full effect in how they devise their sales and promotions. They are counting on you to lose the rational grip on your brain as its pleasure center lights up seeing the big flashing 60% OFF.
Your scepticism is drowned in a gush of dopamine.
The Toolbox of the Dark Arts
So, how do retailers make these things work? First things first. They use the idea of artificial scarcity or implied scarcity.
A friend of mine, Vikash & I had gone shopping for a bookshelf at Home Town in 2006. As we entered we saw one on offer for ₹1999, a very good price it would seem. But the board said ‘Only 17 left’. We decided to check other options in the store and circle back to this one later. When we came back after about 15 minutes, the board said ‘Only 3 left’. Vikash said ‘let’s book it!’ and so we did. We were promised delivery in two weeks. As we prepared to leave the store out of curiosity we decided to check the item again to see if it had sold out. Sure enough, it had “sold out” because we saw a store staff calmly replace the ‘Only 1 remaining’ board with a new board. One that said ‘Sold Out’, right? Wrong! It said ‘Only 50 left’. We fell for the oldest trick in the book - implied scarcity. (Full disclosure: I was an economics teacher back then too)
This brings us to the other devious part of this discount plot – the markups. We are all sufferers of what Uri Gneezy author of the book The Why Axis calls ‘contrast effect’ and Dan Ariely (author of Predictably Irrational) calls ‘relativity’ – our brains are tricked by relative prices and values. A gaudy overpriced trouser I do not need at 70% off? Wow what a good deal! A ₹399 pen drive at ₹1? OMG I’ll take one though I don’t have a USB port to plug it in! A jacket worth ₹1298 that I actually need for my morning bike ride for ₹900? Meh. Even though both offers save you the identical amount – ₹398 – and you need one of the items, your brain jumps at the first offer because of the contrast effect. (The two offers literally send different signals to your brain – ask a neuroscientist!) The biggest complaint about Flipkart’s very first Big Billion Day sale in 2014 was exactly about this trick of ramping up prices before the sales and then marking them down making it look like a bargain.
As a Wall Street Journal article in 2016 explained:
The common assumption is that retailers stock up on goods and then mark down the ones that don’t sell, taking a hit to their profits. But that isn’t typically how it plays out. Instead, big retailers work backward with their suppliers to set starting prices that, after all the markdowns, will yield the profit margins they want. The red cardigan sweater with the ruffled neck on sale for more than 40% off at $39.99 was never meant to sell at its $68 starting price. It was designed with the discount built in.
It is relatively common retail practice and you have to really train your brain hard to not fall into this trap. In fact while instances of discounting have gone up in recent years, retailers’ profit margins have been stable; that tells us something.
There is no other way to put it. What you always suspected is right – the low, low prices kind of drive you temporarily insane. So, what to make of it then? Admittedly, you would need a lot of effort and self discipline to keep yourself rational when considering prices and purchases at places like these and sometimes we lull ourselves into that false sense of security that we are smart shoppers because we always shop in ‘bargains’.
This is where having a sort of smell test for a price comes in handy.
For everything, there is what economists call a ‘private value’ and a ‘common value’. So, based on our contexts and our stakes, we react to prices the way we do. So when your cousin shows you the gaudy shoes she got for a bargain at ₹ 2000 you scoff at her because your ‘private value’ for the shoes weren’t as high as hers was. It could be reversed when you try to explain why you paid ₹ 5,000 for that replica Liverpool jersey.
There is no stigma in having your own valuation parameters (the ‘private value’) to figure out if a price is right. And neither is it a problem if you buy that shirt at full price and really like wearing it, no matter what your friend nags you about. Prices are dynamic. And they make sense to us or not based on certain idiosyncratic reasons other than just the generic reasons of demand and supply. The moment you start paying heed to that you are already making a smart decision. Being sceptical of prices is actually a good thing. It allows your brain to ask that all important question – Is this worth it? And that consequently should lead to good economic decisions.
Ultimately prices are nothing but information. They convey whether something is rare (high price, like, say, a designer gown) or abundant (low price, like those socks in the department store bargain bin). But like any piece of information, you don’t have to believe everything at face value. The price usually hides as much as it reveals and that is where digging a little deeper, comparing prices, being sceptical about them if they don’t pass the ‘smell test’ (or common sense test) and taking a ‘cooling off’ period before coming back and asking yourself – do I really need this? come in handy.
That will ensure you don’t go price insane in the brain.