Newswise — December is the month when most people scramble to find gifts for their friends and family. In the process, many decide to treat themselves to a gift as well — especially when they notice that something they've wanted is now on "sale." According to a business professor at Washington University in St. Louis, most people have an easier time justifying an indulgent purchase when there is the promise of saving money, especially when it is in the form of an unexpected discount or rebate. The catch is that frequently customers aren't saving as much money as they might think.
Effect of discounts
It takes just one good excuse to make most people buy, says Amar Cheema, assistant professor of marketing at the Olin School of Business. And discounts are usually the best excuse. A consumer who is trying not to spend too much may use the rebate as an excuse to overcome self-control and buy. A typical example of this is when a shopper had been thinking about buying a new TV, but hadn't quite been ready to shell out the big bucks. Then one day when he is out buying presents, he discovers that the store is offering a 20 percent discount on the $1000 TV he had been looking at. Suddenly that consumer has reason to actually make the purchase that very moment, Cheema said.
"The customer is using this unexpected price drop — a "windfall gain" — as a justification to buy something he wanted to buy anyway," Cheema said.
"Discounts are also more effective for luxury purchases than for necessities. A discount breaks down any self-control the shopper had before seeing the sale and helps assuage the guilt of indulging in the purchase." Even though the shopper intellectually knows that the price of the item may drop further during the post-holiday sales, he is probably going to buy the TV on the spot rather than wait.
Redeeming mail-in rebates
Mail-in rebates have the same effect on consumers, but are even more perilous, Cheema said. A rebate will convince a customer to buy something, but chances are a lot of those consumers who do purchase an item that has a mail-in rebate aren't going to save a dime.
"Rebates require the consumer to mail in some kind of form. Recent data show that only 40 percent of the shoppers actually take the initiative to do this correctly," Cheema said. "The retailer ends up getting the benefit of selling an item at full price and the customer doesn't get the discount he was counting on. For instance, TiVo Inc. 'saved' $5 million when about half of 100,000 new subscribers failed to redeem their rebates during the Christmas season last year."
"Unexpected discounts seem like found money to the customer; money they didn't have before," Cheema said. "People have a very hard time asserting self-control with found money and they end up indulging."
Even when you do file the rebate correctly, by the time you receive the rebate a couple of months later you have forgotten about the expense, and treat the check as an unexpected bonus. You are likely to spend it more easily than you would money in the bank. At the very least, if you do buy something and later get a $200 rebate check in the mail, deposit the "found money" in your bank, preferably in your savings account, Cheema suggests.
Easier credit
Yet another incentive to indulge is the offer for deferred payment on an item. In other words, "Buy now. No interest. Don't pay until next spring." Cheema said as long as the consumer actually pays off the entire amount in time, buying on credit can be a good idea. But, he cautions, when people do fall behind, the retailer may charge high interest rates and the consumer may end up paying more than they would had they paid with cash at the time of sale.
"Credit also appears to be easier to come by this time of the year, in terms of higher credit limits on credit cards, and balance transfer checks with low interest APRs," he said. These offers may make the consumer think they have more money to spend, while it may actually make them more likely to be in debt as a result of using this easy credit. As a result, they may also end up paying high finance charges on their credit cards.
Be deliberate
Cheema said that often the customer isn't getting much of a deal on the Christmas season discounts. Discounts, mail-in rebates, and credit make it more likely that the consumer will overspend in the holiday season. The manufacturer, retailer, and the credit-card company come out on top most of the time. So you might as well wait until after Christmas to buy things for yourself. At that time or later, retailers are eager to get rid of their inventory and really start cutting prices. You can then buy those presents to yourself, if you can afford them, with cash.
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