It’s Black Friday in America. And in some other places.
On Monday, it will be Cyber Monday.
The stores are already bedecked with their bargain and LOW PRICE and flashy “Only 2 per customer” signs. I have no doubt that the queuing has already begun.
Here’s a fun fact: the reason it’s called “Black” Friday is because it’s the day that stores usually go from being in the red to making a profit (in the black). And yet, here most people are, frothing at the mouth, eager to assist.
So I wanted to write a post about all the things that make us really vulnerable to retailers (and I’m relying heavily on this article from the Atlantic, and this one, and this one from Forbes):.
Thing 1: We’re Really Bad at Math
Especially when it comes to percentages.
A recent study posed the following scenario:
Starbucks offers two deals on a cup of coffee:
- Get 33% more coffee for free!
- 33% discount on the regular cup!
The participants were asked what the better deal was.
The general response: they’re the same thing.
That would be a no. If you start with a 300ml coffee for $1:
- The first deal offers you 400ml for $1 (ie. $0.25 per 100ml)
- The second deal offers you 300ml for $0.66 (ie. $0.22 per 100ml)
Or: the second deal is equivalent to giving you a 50% more coffee for free.
Further evidence of the problem: I’m pretty sure that almost everyone who read those bullet points had an eye-glaze, I’ll-take-your-word-for-it moment…
Thing 2: We’re completely influenced by random numbers
I wrote about this in my third Heresy post (I do love a religious reference). In the one of the experiments I described, students were asked to write down the last two numbers of their social security number on a page, then bid on a variety of items as they were presented in the room (they had to write down how much they’d be willing to pay for them). The general finding: the higher your last two numbers of your social security number, the more you were willing to pay.
In real life, this plays out something like this:
- They want HOW MUCH for that bottle of 18 year old Chivas Regal?
- *blank speech bubble*
- Oh look at this bottle of Bombay Sapphire gin. It’s only R280.
And suddenly, you’re buying gin, when you only really came in to buy some mixers for a party.
Thing 3: We’re middle-of-the-road people
We don’t order the cheapest bottle of wine on the menu (because we don’t want to look cheap and/or we wonder if there’s something wrong with it that it’s so cheap). Or the most expensive one (because we don’t want to look like an idiot and/or a spendthrift).
Retailers know this.
So they place their high margin items between something much pricier and something cheaper.
Thing 4: We Have No Idea What Things Are Worth
We rely on shorthand.
Example: how on earth do you know what an ice-cream maker is worth? You certainly don’t do a cash flow forecast in your head to try and work out how much you should pay before it makes better sense just to buy your ice-cream.
But we’re capable of seeing that one ice-cream maker is cheaper than another.
So shops place competing models in close proximity, so we don’t have to do the burdensome think – and can just jump straight to “this one seems like a good deal because it’s cheaper than that one, with the same features!”
Thing 5: We Get Tired Quickly
How often do you get to the till with more than you planned on buying?
Once you’re committed to buying a shirt – it’s increasingly likely that you’ll get a tie to match. And another shirt. And look at those jeans.
It’s why we need lists. To give us restraint when the decision fatigue kicks in.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.