Economics at the Mall

The other day, when I was browsing through some products in the Mall, the discounting mechanism/ad that they had put up made me think for a while, for it was slightly unusual. Let me explain.

Usually, I have seen discounts such as

Buy One, Get One FREE

Buy One, Get 10% OFF, Buy Two, Get 30% OFF

Etc.

There is nothing devious about such discounting. It is very straightforward and linear and is understood by the majority. What caught my attention at this particular occasion was the ad which said,

Buy One, Get 30% OFF

Buy Two, Get the Third One FREE

Buy Three, Get Two more FREE

Lots of ‘FREE’ text – Hmm. Moreover, this discounting is counting on self-indulgence. I would usually buy one product. However, looking at this discount ad, the usual thought process is to buy one more, and collect three products for the prices of just two. Extend the concept to apparel wear and the discount marketing becomes apparent. People usually are inclined to buy more than required whenever they see such ads this – and nothing wrong with it as long as the numbers are understood.

Here’s the deal. The thought process usually is – I will buy one product; once I buy the second product, the third product is FREE; so essentially, I have a 50% discount on the last two products. The math is correct. However, what happens though is that we usually forget that we are paying full price on the first product (which was eligible for a 30% discount) and claim that we have had a 50% discount on the purchase. However, the discounting mechanism actually translates to -

Buy One, Get 30% OFF

Three products for 33% OFF

Five products for 40% OFF.

(Put in $10 per product, the math is very elementary)

I guess what the Mall is counting on is not on our math skill and ability, but our behavioral mindset. Obviously, discounts are almost never on necessities and always on ‘disposable income’ items (apparel being a prime example). Behaviorally, you would want to go for one more shirt, which will result in three shirts etc. We usually tend to miss that the first product would have been 30% OFF and calculate, to our own worse-off-cash-expense a 50% OFF in our thought process.

(The analysis assumes that all product prices are equal. If there is variability around prices, I would guess that the discount would work out to be far less than what it seems on the ad.)

So, here’s a way to think about this. If I am buying one shirt for 30% OFF, isn’t an measly incremental 3% a little too less a discount to buy two more shirts? (unless they are an absolute necessity). Only 3% discount, more space taken in the wardrobe and less cash in my pocket – I said, ‘No, Thank You’ and left the Mall.

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