The behavioural economics of discounting, and why Kogan would profit from discount deception



The consumer watchdog has accused Kogan Australia of misleading customers, by touting discounts on more than 600 items it had previously raised the price of.
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Ralph-Christopher Bayer, University of Adelaide

Kogan Australia has grown from a garage to an online retail giant in a little more than a decade. Key to its success have been its discount prices.

But apparently not all of those discounts have been legit, according to the Australian Competition and Consumer Commission.

The consumer watchdog has accused the home electronics and appliances retailer of misleading customers, by touting discounts on more than 600 items whose prices it had sneakily raised by at least the same percentage.

Kogan is yet to have its day in court, so we won’t dwell on its case specifically.

The ACCC alleges Kogan’s ‘TAXTIME’ promotion offered a 10% discount on items whose prices had all been raised by the equivalent percentage.
ACCC

But the scenario does raise an interesting question. How effective are these types of price manipulation? After all, checking and comparing prices is dead easy online. So what could a retailer possibly gain?

Well, as it happens, potentially quite a lot.

Because consumers are human beings, our actions aren’t necessarily rational. We have strong emotional reactions to price signals. The sheer ubiquity of discounts demonstrate they must work.

Lets review a couple of findings from behavioural (and traditional) economics that help explain why discounting – both real and fake – is such an effective marketing ploy.

Save! Save! Save!

In standard economics, consumers are assumed to base their purchasing decisions on absolute prices. They make “rational” decisions, and the “framing” of the price does not matter.

Psychologists Daniel Kahneman and Amos Tversky challenged this assumption with their insights into consumer behaviour. Their best-known contribution to behavioural economics is “prospect theory” – a psychologically more realistic alternative to the classical theory of rational choice.

Kahneman and Tversky argued that behaviour is based on changes, which were relative. Framing a price as involving a discount therefore influences our perception of its value.

The prospect of buying something leads us to compare two different changes: the positive change in perceived value from taking ownership of a good (the gain); and the negative change experienced from handing over money (the loss). We buy if we perceive the gain to outweigh the loss.

Suppose you are looking to buy a toaster. You see one for $99. Another is $110, with a 10% discount – making it $99. Which one would you choose?

Evaluating the first toaster’s value to you is reasonably straightforward. You will consider the item’s attributes against other toasters and how much you like toast versus some other benefit you might attain for $99.

Standard economics says your emotional response involves weighing the loss of $99 against the gain of owning the toaster.

For the second toaster you might do all the same calculations about features and value for money. But behavioural economics tells us the discount will provoke a more complex emotional reaction than the first toaster.

Research shows most of us will tend to “segregate” the price from the discount; we will feel separately the emotion from the loss of spending $99 and the gain of “saving” $11.

Economist Richard Thaler demonstrated this in a study involving 87 undergraduate students at Cornell University. He quizzed them on a series of scenarios like the following:

Mr A’s car was damaged in a parking lot. He had to spend $200 to repair the damage. The same day the car was damaged, he won $25 in the office football pool.
Mr B’s car was damaged in a parking lot. He had to spend $175 to repair the damage.
Who was more upset?

Just five students said both would be equally upset, while 63 (more than 72%) said Mr B. Similar hypotheticals elicited equally emphatic results.

Economists now refer to this as the “silver lining effect” – segregating a small gain from a larger loss results in greater psychological value than integrating the gain into a smaller loss.

The result is we feel better handing over money for a discounted item than the same amount for a non-discounted item.

Must end soon!

Another behavioural trick associated with discounts is creating a sense of urgency, by emphasising the discount period will end soon.

Again, the fact people typically evaluate prospects as changes from a reference point comes into play.

The seller’s strategy is to shift our reference points so we compare the current price with a higher price in the future. This makes not buying feel like a future loss. Since most humans are loss-averse, we may be nudged to avoid that loss by buying before the discount expires.

Expiry warnings also work through a second behavioural channel: anticipated regret.

Some of us are greatly influenced to behave according to whether we think we will regret it in the future.

Economic psychologist Marcel Zeelenberg and colleagues demonstrated this in experiments with students at the University of Amsterdam. Their conclusion: regret-aversion better explains choices than risk-aversion, because anticipation of regret can promote both risk-averse and risk-seeking choices.

Depending to what extent we have this trait, an expiry warning can compel us to buy now, in case we need that item in the future and will regret not having taken the opportunity to buy it when discounted.

Discounting is thus an effective strategy to get us to buy products we actually don’t need.

Look no further!

But what about the fact that it is so easy to compare prices online? Why doesn’t this fact nullify the two effects we’ve just discussed?

Here the standard economics of consumer search would agree that consumers might be misled despite being perfectly rational.

If a consumer judges a discount promotion is genuine, they have a tendency to assume it is less likely they will find a lower price elsewhere. This belief makes them less likely to continue searching.

In experiments on this topic, my colleague Changxia Ke and I have found a discernible “discount bias”. The effect is not necessarily large, depending on circumstances, but even a small nudge towards choosing a retailer with discounted items over another could end up being worth millions.




Read more:
Why consumers fall for ‘sales’, but companies may be using them too much


Once a consumer has made a decision and bought an item, they are even less likely to search for prices. They therefore may never learn a discount was fake.

There are entire industries where it is general practice to frame prices this way. Paradoxically, because this makes consumers search less for better deals, it allows all sellers to charge higher prices.

The bottom line: beware the emotional appeal of the discount. Whether real or fake, the human tendency is to overrate them.The Conversation

Ralph-Christopher Bayer, Professor of Economics , University of Adelaide

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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The trouble with Big W: don’t blame online for killing discount department stores


Gary Mortimer, Queensland University of Technology

After weeks of speculation, Woolworths has confirmed it will close 30 of its Big W stores in Australia, as well as two distribution centres. This represents about 16% of its 183-strong network.

The obvious culprit, and the one identified by many analysts, is online shopping.

As one industry analyst explained: “The physical department store footprint is likely to continue to shrink as online sales penetration increases further.”

Online shopping is certainly a factor, but it is not the primary reason for Big W’s troubles.

Though online shopping in the department and variety stores category is growing fast (by 29.6% in 2018 according to the NAB Online Retail Sales Index, the total amount of money spent online by Australian shoppers – A$28.8 billion – is still only about about 9% of what is spent in traditional bricks-and-mortar stores.


Online retail sales growth by industry in the 12 months to December 2018,
NAB Online Retail Sales Index

More important to Big W’s woes is the growth of the so-called category killers, which are disrupting the entire discount department store business model. It a threat to which Big W has failed to respond with the same agility of rival Kmart.

Departed departments

If you’re old enough you may remember getting your wall paint mixed in the Big W hardware department, or buying car accessories from its automotive department. There was also a large “sight and sound” department filled with televisions, sound systems, videos and CDs. Discount department stores truly lived up to the idea of a variety store.

‘You know the price is low, everyday’: A television advertisement for Big W in 1994.

But the profitability of all these market segments for department stores has been eroded by the growth of “category killers” – retailers specialising in the same product categories.

Examples include Office Works for office supplies, Rebel for sports equipment, JB Hi-Fi for audiovisual, Super Cheap Auto for car parts, and Bunnings for hardware. All have taken market share from the discounters. These stores compete on price and have superior range, and shoppers trust the expertise of staff working in a specialist shop.

Speed of change

The popularity of category killers explains in large part the stagnant sales and talk of store closures throughout the department store segment.

Harris Scarfe and Best and Less are reportedly struggling. The Reject Shop’s net profit for the first half fell from an expected A$17 million to less than A$11 million.
David Jones’ half-year profit fell 39% to A$36 million. Myer reported a 2.8% drop in total sales for the same time frame.




Read more:
What does the future hold for our traditional department stores?


Wesfarmers expects earnings from its department store brands Kmart and Target to fall about 8% this financial year. Eight Target stores closed during the first half of the financial year, with another six closures expected by the end of June.

Cutting losses

Kmart is considered Australia’s discount department store “darling”. A decade ago it was on life support. Under the direction of chief executive Guy Russo it doubled it profits by 2015.

A key to the turnaround was recognition it needed to quickly reduce or exit categories it could not compete in, such as hardware, automotive, fishing, consumer electronics and sporting goods. It has turned to homeware, soft furnishings, manchester and kitchenware.

There appears no such swiftness in Big W’s moves.

Big W’s chief executive from January to November 2016, Sally MacDonald, reportedly wanted to closes stores and make other major changes but was thwarted by the board of Woolworths Group, owner of Big W.

Such differences in strategic vision explain why MacDonald left the role within the year.

This process of “right-sizing” therefore seems long overdue. To what extent it makes Woolworths a sustainable business, however, will depend on future response to changing circumstances.

What is certain is that discount department stores aren’t what they used to be; and if they want to be around in future, they probably can’t be what they are now.The Conversation

Gary Mortimer, Associate Professor in Marketing and Consumer Behaviour, Queensland University of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

UK TRADITIONAL WING OF ANGLICANS TO LEAVE CHURCH OF ENGLAND


There are effectively two religions being practised in the Church of England, a leader of the evangelical or traditionally Protestant wing of the Anglican Church said this week, reports Hilary White, LifeSiteNews.com. On one side are the theologically ultra-liberal leadership who support not only women’s ordination but homosexuality, while on the other are those who hold to traditionally Christian and biblical principles.

The Rev. Rod Thomas was speaking to the annual conference of the Reform movement in London this week. Thomas said that at least twenty-five parishes, representing up to 3000 practising Anglicans in the UK, are already seeking alternate oversight from bishops not associated with the ultra-liberal theological trends that dominate the Church of England.

“We are actively going to take forward the agenda of alternative episcopal oversight. We are no longer able to sit back and wait to see what happens,” Rev. Thomas said.

“The most radical scenario which I don’t discount, but neither am I saying we are pressing for, is where you have a shortlist of names and ask overseas persons to consecrate them so they cater for individuals in this country.”

The Reform movement was founded in 1993 to oppose the ordination of women as clergy in the Church of England and represents the established Church’s traditional protestant or “evangelical” wing.

Thomas urged support from Reform Anglicans for the Fellowship of the Confessing Anglicans, a body set up by the bishops who attended this summer’s Global Anglican Futures Conference in Jerusalem.

Thomas said that the group believes in remaining within an “an Episcopal church for good theological and pragmatic reasons.”

“However, where the teaching and actions of a bishop promote an unbiblical way of thinking, then we simply have to look elsewhere for a bishop.

“If we fail to do this then our congregations will not see us taking New Testament teaching seriously and the process of accommodation will continue,” he said.

This summer’s Lambeth Conference issued instructions for Anglican congregations not to continue to seek “cross-border” oversight from bishops outside traditional Anglican episcopal boundaries.

Meanwhile traditionally Christian congregations in the US are winning their cases in courts to retain their parish properties while at the same time removing themselves from oversight by the Episcopal Church of the US (ECUSA). In the Diocese of Virginia this week, a judge ruled that a parcel of land given by Christ the Redeemer Episcopal Church was properly deeded to Truro Church, a traditional church, and that the diocese has no claim to it. The diocese has recently lost three times in lawsuits to retain some dozen church properties.

Conservative Anglican writer and commentator David Virtue wrote, “The Anglican Communion is coming apart at the seams while Dr. Rowan Williams tells a London reporter that he admires the atheist [Dr. Richard] Dawkins.” Dr. Williams, the Anglican Archbishop of Canterbury, was reported to have recently said about Dawkins, “There’s something about his swashbuckling side which is endearing. I invited atheism’s high priest and his wife to a Lambeth Palace party last year. They were absolutely delightful.”

Report from the Christian Telegraph