Thursday, 6 July 2017

Why we are sucked in by good deals for things we don't need

Back in April, had an interesting article:
IF you spent the weekend spending up you’re certainly not alone...
Speaking to, Dr Brockis, who specialises in brain health said retailers were cashing in on our buying habits.
The Future Brain author said most people got excited buying things with many feeling a great sense of control when they handed their wallet over.
“Our brain reacts to buying things,” she said.
“We either feel a sense of satisfaction we have something we want or reward if we’re buying for other people.”
Dr Brockis also said sales were an effective tool for retailers because shoppers were far more likely to buy something they didn’t need.
“That thinking we got such a bargain is what retailers have really honed in on,” she said.
“If something is significantly discounted shoppers are far more likely to buy it whereas if it’s small discount they’re not as drawn to it. Big discounts pique our curiosity.”
She said discounts made buying irresistible for some.
“The problem is our shopping bias to pay less for a given item can blind us to the fact we actually don’t need the item at all or it doesn’t suit us or might be the wrong size,” she said.
Of course, if a good becomes less expensive, consumers will buy more of it. That is the simple Law of Demand, which underlies the downward-sloping demand curve. However, even if a good is less expensive than before, it makes little sense for consumers to buy it if they have no use for it, i.e. if "we actually don’t need the item at all or it doesn’t suit us or might be the wrong size". So what is going on?

In behavioural economics, we recognise that consumers not only derive utility from the good or service they purchase, but also from the act of purchasing itself. We call this transaction utility. If a consumer feels that they are 'getting a good deal', this makes them happier (higher utility), and makes them more likely to purchase.

The consumer might feel like they are getting a good deal because the price is below some reference price, e.g. $10, marked down from $15. This feels like a good deal. Or perhaps the good is bundled with other things, such that the bundle feels like a good deal. This explains why we buy combo meals when we don't really want a drink or fries, or why we buy-two-get-one-free when we really only wanted one item.

Now, marketers know about transaction utility and use this to influence our purchasing behaviour. That's why they emphasise the original price whenever a discount is offered. Or even worse, why they may initial offer goods at a crazy high price, in order to maximise the discount that is subsequently offered. Taking advantage of our quasi-rational behaviour increases their profits.

Fortunately, we can somewhat protect ourselves against falling victim to such 'false' transaction utility, but only if we're aware of it. Always ask yourself: "Am I only buying this because it seems like a good deal, or do I really need this?" It may not work all the time, but at least it might save us from our worst excesses.

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