Friday, April 4, 2008

Our Fascination with "Free"

I came across an interesting article today written by Paul J. Lim for Yahoo Finance. The article, called “Why you’re a big sucker,” captures a growing problem in society: Spending more when we planned to spend less.

The question, then, is why do we spend more than we want to? Dan Ariely, a noted behavioral economist says he’s found the answer: Our fascination with “free” offers. Marketing 101 at its finest—appealing to or tricking the senses in order for people to spend more money. Dan Ariely helps to explain part of the problem in the following excerpt:

“Question: How else do we act against our best interests?

A. By comparing prices on similar items.

Question: Wait, I thought that was smart to do?

A. It is, but only if you compare everything with everything. If you just compare items near one another, you open yourself up to being influenced. When you open a menu at a restaurant, you may not realize that the prices you see affect what you're willing to pay. If the most expensive entrée is $45, you might decide $30 is an acceptable price. Should the restaurant add a $60 dish, you may be willing to pay $45. The same issue comes up when shopping for real estate. Letting a broker show you a house above the top of your range can be costly.

Question: So how do we overcome irrationality?

A. There's no cure-all. But when I see the word free, I now ask myself, "What's the seller trying to do here?" Also, it sounds strange, but try not to look at price, not at first. Decide what you want and what you're willing to pay without being influenced by outside factors.”

I’ve noticed major department stores doing this more and more. Raising the sticker price well above what someone may be willing to pay, but advertising the entire store at 50%-75% off. This marketing act tricks the senses into believing we are getting a great deal—but are we?

Although it may be a stretch to suggest completely ignoring the sticker price, knowing what you’re willing to pay and setting your limits will surely save you money in the long run...

15 comments:

Author said...

Hello Brian. I don't know if you have come across this in-depth special from business week, but it would be well worth your time. Here is the link:

http://www.businessweek.com/magazine/content/08_12/b4076078839174.htm?chan=search

Cheers.

Brian Reese said...

Great article...thanks again for the info!

I'll be sure to keep reading your blog--you seem very motivated to do well on the GMAT.

Take care!

Best,
Brian

Skyler Reep said...

This is true. Marketing is everywhere. The only way NOT to be a victim is to be aware. A friend of mine asked why I was advertising my apartment for $799 instead of $800. "It just makes people feel like you're tricking them," she said. Maybe so, but it's a tried and true marketing method, and it's everywhere. Heck! I'll even throw in FREE running water! Interested?

Brian Reese said...

Skyler,

The oldest trick in the book! The funny thing is that a lot of people (including me at times) will actually round $19.99 (or $799) down to the next whole number to really make a case.

"It was only $19 bucks!!!!) What!!!!

Clark Captions said...

Dear Brian,
First, thanks so much for sharing your "undy" story....sooo funny! Here is my spill regarding "free" and "spending money." Keeping in mind that as a mother trying to stick to a budget, you become pretty careful at what and how you spend your $$$. Since our second largest expenditure in the month is on groceries, I have found that it is best NOT to shop at the wholesale places like Costco or Sam's club. It may look like you are getting a good deal because you are buying in bulk, but in reality, if you do the math, you aren't saving that much. Plus, you always end of spending more because of the marketing and teasers that you find everywhere in the store. My advice, find the grocery store that will match ads, like Wal-mart. Stick to one store, and find every ad that has been placed by your other local stores, and then have Wal-mart do a price-match on each item that you can find from the other ads, that are on your list. (and, keep to the list!) (I hope that makes sense)

As far as department stores go....you can buy name brand clothing from any department store, if you are not too concerned about wearing the latest fashion. Here is what you do....shop the seasonal clearance aisles....a lot of times I will go to Old Navy, JC Penney, or the Children's Place at the end of the season, and buy a size bigger for my kids. If you plan well, you can actually get a boat load of product, for a very small price.
($2.99 for shirts, skirts, and sweat pants, and jeans.) You just have to wait until next season to wear it! But, if you plan well, you are always one step ahead of having something great and new to wear. (it just might be last years fashion.) As far as my philosophy on "free".....I really don't think anything is free, so don't get too caught up in that mind game. I hope this helps!

Stacey

Brian Reese said...

Stacey,

Great comment. I definitely frequent the clearance racks! Hope all is well!

-Brian

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