Bottom Line Inc

Discounts That Actually Cost You Money

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Retailers have latched onto a way to offer giant percentages off that are mesmerizing to shoppers—but that are not what they seem. The pitch: You get a gigantic discount—typically 50%, 60% or even 70% off—but the fine print notes that you get that discount only on a second or third of multiple similar items. Signs in store windows and on store shelves (and online) shout out the percentage…and shoppers often don’t do the math to see just how unimpressive these offers typically are.

Example: Based on an offer of “Buy two, get the third 50% off,” you happily tote three items to checkout, where you then receive a total discount of 17% ­(because you pay full price for the first two items).

Marketing professor Akshay Rao, PhD, has identified additional ways shoppers often get percentages wrong in potentially costly ways…

Get-more vs. save-more mistake. A store offers your favorite ground coffee for 50% off the usual $10 a pound some weeks…and it offers 50% more coffee for free when you buy a pound for $10 during other weeks. When should you stock up?

Many shoppers would view these deals as interchangeable because the special offer is 50% with each. But with 50% off, you’re paying $5 per pound…and with 50% more coffee, you’re ­paying $10 for 1.5 pounds, which is $6.67 per pound and 33% more costly.

Double-discount mistake. A clothing store is selling the sweater you want for 50% off its list price…but when you take it to the register, the sales person confides that next week the sweater will be on sale for 30% off list price, plus there will be a storewide 25%-off coupon that can be “stacked” onto the sale price. Would you save money by putting off the purchase?

Most people mentally add up the 30% and 25% discounts in the second offer and conclude that a combined 55% off beats the 50% off. But when there are two discounts applied to one item, the second inevitably applies to the already-discounted price, not the initial price. If that sweater’s original price is $100, it’s marked down 30% to $70…then the 25% discount is applied to that $70, for a final price of $52.50—which is more than the $50 you would pay with the simple 50%-off sale. Returning next week wouldn’t just be an inconvenience…it would cost you money.

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Source: Akshay Rao, PhD, professor of marketing at University of Minnesota Carlson School of Management, Minneapolis. He has coauthored two papers on consumers’ misinterpretations of percentage discounts. CarlsonSchool.umn.edu Date: October 15, 2018 Publication: Bottom Line Personal
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