It doesn’t add up

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It doesn’t add up
Narayan Krishnamurthy - 05 October 2017

Come festive season and the markets are swamped with sales and discounts on everything from clothes to cars. It is also the perfect time for real estate developers to throw in some spiritual and traditional values into their offerings, as if one would not get a similar home at any other time during the year. On their part, most consumers defy conventional logic by being drawn to free items that are packaged with cars and homes than go for discounted products, where you can clearly understand the value of the deal.

“Free is magic,” says Barry Schwartz, author of The Paradox of Choice. “If you offer something for free, people will gladly spend money to get it,” he has said on numerous occasions. The power of freebies is deep, because consumers assume they are getting something for nothing and respond in a very unconscious way—they land up buying things that may not be as valuable as they assumed them to be. The reason: most buyers feel obliged to buy more, because during festivals
they want to match up to the peer pressure and sometimes generally because they feel such a deal will never come back again.

A classic freebie with homes is modular kitchen, LED and ACs. It is a different matter that eventually the modular kitchen may not shape up the way you would want it. The LED TV and AC may be locally assembled, which may consume power, which would shoot up your operating expenses on these gadgets a lot more than you would have factored in. It is strange how rational thinking consumers sometimes tend to overlook the logical, that if someone was offering something
free there is an assumption that he would really not be losing money?

Poor with mental maths

Most people assume that a 33 per cent price increase and 33 per cent discount are same; they are not. Let us take an example of, let’s say a dress for Rs 1,500. Now, a 33 per cent discount will bring down the price of the dress to Rs 1,000. But, a 33 per cent mark-up on Rs 1,000 will be actually just Rs 1,330. To get the math clear, a 50 per cent mark-up on Rs 1,000, will get the pricing right. This is where the perception that one is getting a superior discount actually turns the decision to buy financially wrong. I would be happy to buy 33 per cent more chocolates than buying chocolates at 33 per cent discount. Purchase decisions during festive season are mostly based on emotion and for many this is the time for celebrations laced with following one’s values. There is nothing wrong in following these practices, as long as you are not clouded by the real worth or price of the freebie that you may assume is a great buy. Instead of trying mental maths, may be try to work out the maths, and if you feel the seller would have actually lost if the numbers were correct, chances are the deal is not in your favour.


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