24 December 2015
The Economics (or Psychology) of Sales Shopping
by Frank O’Nomics
As we breathe a sigh of relief having bought and wrapped the final gifts for Christmas, some of us relax to enjoy the event. For others, this is a time spent furtively waiting for the sales to start, with a view to capitalizing on opportunities apparently not available before 26th December. There are even some who, incensed by the prospect of being able to buy gifts 20-30% cheaper by waiting a mere 2 days, agree with loved ones that they will exchange gifts after Christmas. In fact, Deloittes have calculated that the average discount in sales this year is 41.8%, the highest since 2008, and according to the sales research company RAH Advisors, 73.8% of shops are still holding sales. Many economists regard Christmas as a “deadweight loss”, which is calculated as the difference between the price a gift giver pays for a good and the price that the receiver would have paid. This is calculated at around a $4 billion cost in the US alone. Interestingly, also in the US, there is even an organization in the US called Buying Nothing Christmas, although this organization was formed by a group of Canadian Mennonites more to rebel against the commercialization of Christmas rather than for economic logic. Most of us would not contemplate not buying presents, but we will be looking for deals after the event. However, I would argue that, either way, buying post-Christmas because goods are cheaper, may be of questionable logic. There is much about the sales season to ignore and there is a real danger that you will finish up buying goods that you did not really want, and which are not necessarily a bargain either.
Rather than taking my word for it I have utilised the help of some senior academics and even a Nobel prize winner. In his widely acclaimed book “Thinking, Fast and Slow”, Daniel Kahneman (who won a Nobel prize for his work on Behavioral Economics in 2002) reviews the 2 areas of our brain – the side that acts instinctively, and that which applies logic and consideration. While the book is much broader than just looking at the how we are duped by retailers, there are certainly some applications. Perhaps the most appropriate when looking at sale shopping is his description of the anchoring effect. To illustrate this consider 2 questions: was Mother Teresa older or younger than 110 than when she died? And then, how old was Mother Teresa when she died? As a result of the anchoring effect of the high number in the first question, respondents have a strong bias to come up with a higher number than they would have otherwise have done, and very likely a higher number than is true. This bias occurs in sale shopping in the same way – when you see a cashmere jumper reduced from £370 to £150 you are inclined to see this as a bargain – but if you were asked before going into the shop what the right price is for a cashmere jumper, you would probably come up with a figure well below £370, and probably below £150. Now clearly there are laws against appearing to discount goods that were never on sale at the higher price, but stores typically put these expensive items in an area than does not waste prime footfall space. The point here is that the jumpers were never really expected to generate a price above £150 – so how can that be a bargain?
We should not despair totally, as we can use this intuitive analysis to find a reasonable bargain, particularly if we are looking at items that are last year’s lines or have an element of reduced quality. Christopher Hsee of the University of Chicago conducted a study where 3 groups of people were asked to value two sets of crockery in a sale. The first set consisted of 8 dinner plates, 8 dessert plates and 8 bowls, while the second had the same, but with 8 cups and saucers in addition, some of which were damaged. The first group was asked to value both sets and, not surprisingly, all were prepared to pay more for the second batch than the first. However, when the other 2 groups were asked to price just the first batch or just the second, the result was very different. This time the average price offered for the second batch was lower than the first. Shoppers need to be shown a very good price to be persuaded to buy anything that is old or substandard. I am not suggesting that you should be buying up shell suits and leg warmers, but, if you are looking for a good deal at the sales, look for items in the remainder area – they are very likely to be being offered below cost.
Sales are a great opportunity for retailers to shift old stock; the key is to have decided what you want to buy before the sales are announced and then just stick to those goods. The retail consultant Christine Cross recommends going online to put together a wishlist and set alerts when the shop starts discounting. Sadly this is a discipline beyond most of us and perhaps puts too clinical a process on an activity that many regard as pleasurable. If you (like me) are one of this larger group then perhaps the only decent advice is – keep the receipt. Happy Christmas and fruitful sales shopping to all.
