Beware of holiday season sales! They do not save you money.

The other day, I happened to catch prime time news on one of our leading TV stations, something I had not done for a while. What surprised me was not the usual bad news (that is expected), but the sheer amount of adverts that were running. News content must have been less than 30%, because every couple of minutes, they would take a break, then run no less than 10 ads. Most of these were Holiday sale ads, mirroring what we are seeing on billboards, hearing on radio, seeing on malls etc. It looked like every outlet in the country is holding a Holiday Sale! Exciting stuff! Or is it?

Temper the excitement for a few minutes and walk with me. First, we will evaluate whether buying stuff on sale really saves us money, and secondly look at the tricks that retailers use to disguise full pricing as offer pricing.

Is the sale really saving you money?

Here, we must go to the basic principles of what saving really is. To save is to forgo consumption. To set aside the money you would otherwise spend for purposes of either investing, emergencies, or even to build up a substantial sum to buy something you are not able to buy all at once.

So when you see random discount sales and go ahead and spend money you had not planned to spend because the item was on offer, you may feel like you have saved money – but you have not. You have not forgone consumption, you have instead spent money you did not plan to spend, and now you will either need to cut back on your spending on other things for the month, or save less.

Secondly, a Sale is a trick to lure you into the store and get you to spend more. When an outlet announces that everything is 50% off, you are actually likely to spend more money than you would have spent if that colourful announcement was not there.

There are however exceptional circumstances where a sale might save you money:

If you are buying an item that is on your budget. For example, if you need a TV set and have budgeted full price for it, getting it during the festive or the World Cup season will save you some money. Only if the store does not lure you to also get the home theatre and a new phone all of which will coincidentally be on sale too.
If you are buying utility items in bulk, and the unit price is lower than the bulk price. By utility items, I mean those things we use on the regular and do not spoil easily, for example, dry food items, soap, etc. This may also apply to clothes if you wear similar items e.g socks, underwear, shirts etc, and if you buy them periodically, say once a year.

In this section, we assumed that the store has good intentions – they have actually lowered the prices. The next looks at sales a bit more critically.

Is the sale really a good deal?

Human beings are not very good at knowing the real value of the things we buy. For example, if I ask you whether an apple is an expensive fruit, you will only be able to evaluate this by comparing how much you are spending on an apple, relative to other fruits – as a stand-alone fruit, we do not really know how much an apple is worth. We call this RELATIVITY. Retailers exploit our inability to appraise value in the way they design sales.

The first strategy is to mark prices up, then artificially marking them down. They know that we are unlikely to comparison shop when we see a “50% OFF!” tag. We are also unlikely to remember how much the item costs in another store. RELATIVITY makes us assess value in ways that have little to do with actual value. Which would you buy? A dress priced at 600 bob or the same dress priced 1,000 bob dress which has a 40% SALE discount? 40% looks huge, and therefore we find ourselves gravitating towards buying that seemingly cheaper thing, instead of actually evaluating if the dress is worth the price or what else we could buy for 600 bob. The difficulty in valuing things correctly makes us seek alternative ways to value things and that is where relativity comes in. We compare things with others of the same value. In this case, our reference point for the dress that is 40% off is the price before the sale. That is why they always have the non-discounted price right there, with a big slash.

The second strategy they use is to exploit our scarcity thinking. “OFFER VALID WHILE STOCKS LAST!” triggers a feeling that we might miss out. As a result, we are less likely to evaluate the purchase, leave alone shop around to find out if the price is actually good value for what we are buying.

Finally, retailers will repackage old products, artificially hike the price, then offer them at a “sale” at the old price – often prominently displayed. This is done to entice new customers. They know that once we see this, we will think “If this thing is so expensive, it must be great. Let me buy it now before the price goes back up.”

Bargains make us feel special and smart. They make us believe we are finding value that others haven’t. On a more rational level, we shouldn’t measure the value of what we are not spending but rather, what we are – Dan Arielly (Dollars and Sense)