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...