Discounts have an allure because everybody likes a bargain… But how does one distinguish between real and fake discounts?

The previous article in this column mentioned the commercial facade surrounding special occasions. What about the discount sales that are organised around such special occasions? Surely discounts provide a good opportunity for consumers to buy cheap, don't they?

Discounts have always managed to rouse the curiosity of consumers, but one needs to differentiate between ‘real discounts' and ‘fake discounts'. Real discounts are those in which the price of the item is actually reduced compared to the original sticker price. Fake discounts are those in which the price of the item is retained at almost the same level and the original sticker price is increased to give the appearance of a discount. The tough part is that, in reality, discount sales are not quite as black and white as they appear in theory. Yup, retailers have become smarter. Most discount sales these days come in various shades of grey; i.e. they are a hybrid of a ‘real component' and a ‘fake component' mixed in varying proportions. Let's say a shop owner estimates that he can reduce the price of select items in his store by 10 pers cent. Wouldn't it be more appealing if he could claim that he's offering a discount of 30 per cent by increasing the original sticker prices a bit? Obviously, right? This way you get the feeling of a discount, without the store owner having to drop his price to unreasonable levels.

Why do store owners slash prices to begin with or, for that matter, even give an appearance of slashing prices? The answer is simple — we all like a bargain. Especially us Indians. Originally economists used to think that bargains are not attractive for luxury goods and that they would reduce the image associated with such products. However, the recent recession has proved them wrong, with even the world's most premier jewellers such as Tiffany's being forced to offer discounts to stimulate flagging sales. Optimally priced and well promoted discounts can generate enough additional sales volume by attracting more customers, that it can compensate for the reduced price margins by increasing total profit. For those who slept through high school economics — this is the effect of the law of demand and supply.

Round the year

Until a few years back discount sales were seasonal in India, though lately they have become a perennial phenomenon due to the potent marketing benefits that they bring along. Then how do you differentiate between a discount that is merely a marketing ploy (i.e. the discount has a higher ‘fake component') and a discount that has a higher ‘real component'? Well, the simple way to determine this would be to find out what the original sticker price was before the discount. This is easier said than done because the sticker prices are changed prior to launching a discount campaign. So we are left to seek alternative techniques to establish the validity of discounts.

A good way to start investigating would be to ask yourself: what is the reason for the discount sale? For the retailer to offer a real and significant discount, he needs to be afraid that his stock (inventory) will not move otherwise. The fear could be induced by various factors: launch of a new store, recession, off-season, stock becoming obsolete due to new trends in fashion or technology, defects in stock, export surplus etc. This explains why the right time to squeeze out a great deal on air-conditioners is during winter, although their discount sales are publicised only during summer (what an irony, eh?)! Once you have found out the reason behind the discount sale and are convinced that the reason warrants a discount, you can loosen your purse strings with reasonable confidence that you may be getting a good deal after all. Hardcore shopaholics who don't mind taking the extra effort can of course go one step further and compare prices at other stores to ensure that the store running the discount offer is actually offering the lowest price.

So, are discount sales offered during special occasions worth biting into? Is Father's Day the right time to get the best deal on shirts? The answer is: not necessarily. Special occasions are a good time to get customers to shop thematically. While stores may use special occasions as a basis to run promotional campaigns with claims of attractive discounts aiming to stimulate customer interest and maximise sales, such occasions don't force them to offer a really lucrative deal for the customer. Often, the ‘real component' in discounts offered during such times are marginal at best. Compared to discounts surrounding special occasions, off-season discount sales offer more bang for the buck.

Now that you have learnt how to read into discounts, does it guarantee one-upmanship over the retailer? That's a hard one to pull off. Consumer nature is such that the minute we realise that we can buy something for less, we want to buy more of it. Caught up in the excitement of spending less per item during a discount sale, we actually end up spending more in terms of total spend. Needless to say, this includes buying stuff that we never required in the first place! While we are left gloating about our bargain hunting skills, it is the retailer who actually succeeds by seducing us into overspending.

The writer is a finance specialist. He can be reached at shyamscolumn@gmail.com or www.shyamscolumn.com

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