Engineer's Finance

A person will drive in his car for 15 Kms. to buy a DVD Player which was initially priced at Rs.2000 and now being sold at a discounted price of Rs.1200 – he will buy the DVD player that he does NOT want – but is more interested in saving Rs.1000. However, the same person will not purchase a winter coat (that he may really need) available in his neighboring shop for Rs.9000 offering a discount of Rs.800. The problem is with the so-called “Reference Point”. Rs.800 discount on Rs.2000 value looks more in value for something that you don’t need, but the same Rs.800 discount on an item that you definitely need will not look worth on Rs.9000 price. We tend to look at the percentage basis. Rs.800 on Rs.2000 is 40% discount, while Rs.800 on Rs.9000 is only 8.88%. People may already have a DVD player at home, but just because it is offered at a HIGH Reference point discount – they buy it – thinking that they will gift it to someone else or use it later. All that happens is that we end up buying something that we don’t need and avoid buying things that we really need.

However, from the point of view of the seller – he is offering a huge % discount on DVD player because something (Rs.1200) is better than nothing. The seller may know that a more advanced version of DVD player may be coming in the market very soon, so the current player will be made redundant. It’s better to sell it off at a lower profit (or even at a loss) to extract something, instead of dumping it in the go-downs for no value.

This is exactly what goes on in the investment and insurance business. You become more prone to such marketing gimmicks. The insurance companies put up huge hoardings and place big adverts in the newspapers and television channels – all aimed at disguising the product to be excellent. We tend to ignore that this product may not even fit into our requirements, yet we end up buying them.

Very often I see a 50% discount on sale of 1 Kg. pack of cheese, butter and other dairy products in my local superstore. I’ve seen people blindly grabbing these big size packs of these products – while all they need is hardly 100 or 200 gms pack. The reason for sale is because the expiry date of these products is coming near. If no one will buy it, it will be a 100% loss for the seller. Sell it at 50% discount; at least the seller gets 50% of the money. What really happens is that after purchasing the cheese in bulk, it may not be possible for the consumer’s family to consume it before the expiry date. A significant portion goes in the garbage bin, nullifying the entire discount. But we tend to buy impulsively – just concentrating on discount.