The Games Behind Discounts
Have you asked yourself: Why is this on sale? We really should.
Discounts are funny things. They tempt me to buy things I don’t need. The effectiveness of discounts as a strategy speaks to our universal love for value—they have dedicated holidays!
When I get a one-month subscription to a streaming service for $1, I wonder "‘what’s the point of that?' Is the company so nice to give me another chance to watch more content after my free trial?’ It’s quite thoughtful of them, really. But alas, it’s no coincidence I’m getting the deal in December.
Sure, I could think ‘oh they realize I might spend more time with family so we can watch more things together!’ But that’s not as clear an indicator as their need to show continued growth of subscriber counts to round out the year.
What better way to show a nice bump in subscriber growth to hit all their year-end bonus targets than to forego one month of full revenue and get a bunch of people for a dollar? A discount always serves a purpose for the proprietor of the deal.
Even “going out of business sales” serves the purpose of limiting losses for a failed enterprise. Would the business be going out of business if what they were selling for 10 cents on the dollar were quality products people wanted?
Sometimes, it’s not for the direct monetary benefit. It’s no secret that venture funds running money for pension funds and other rich people have been bankrolling my $5 lunches from whatever food middlemen they are funding.
Yes, I’m sure the coffee shop still makes a profit on my $1 cold brew—same for my $5 beef and rice bowl from the local izakaya. But there’s a lot left on the table to service little ol’ me.
I imagine that’s because the food services operators don’t care about making money today. They need to show different numbers going up, not just the dollar amount. It might be the number of transactions, the volume of chatter, the network, or whatever their proxy for success and potential so they can get more money from more agencies that manage other people’s money.
Then there are things that never go on sale. Whether it’s a designer handbag, sweater with some ugly logo, or hunk of metal on wheels. It’s the antithesis of luxury for them to be on sale. Yet, some go on sale at outlet malls and people line up to get a taste of it in an attempt to squeeze the brand value for all it’s worth before the word gets out the brand is now “outlet-quality” and their tag of luxury is canceled.
Is it not the case we perceive such non-discount goods to be of higher value? But there are times when what rarely goes on sale does go on sale. It’s like seeing an Apple product in Costco.
There’s no way Apple would be so kind and it’s true. I’ll find out Apple is releasing the new version of the discounted product next month, of course they’ll try to get a 30% margin out of the now outdated product.
There are also times when discounts are given on the same product but people don’t want to buy them unless they are at their max price. This happens everyday in the stock market where people want to buy stocks that are priced at all-time highs instead of those that have declined in price. The same stock goes up 30% and now everyone thinks it’ll dominate the world.
I’m not saying discounts are bad. I’ll happily buy the tried and true Apple products for a 20-30% discount. But when I see meat reduced to a “lowest price” I have to wonder if the $3 I’m about to save there is worth the 1% chance of food poisoning that will render me useless for three days, which will cost me time, money and joy for another few more days after that. I know the grocery store isn’t going to take ownership of that. Because, well, what did I expect? A freebie?
There is no free lunch. Discounted stock prices on great businesses should be viewed with curiosity. Same should be said for food, the restaurant special—why is it a special?—and local electronics. The sellers are rarely the suckers, it’s often just a different game.