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The psychology of sales, explained

Discounts make us think we’re getting a good deal. But are we really?

Sales sometimes drive shoppers to buy things they don’t really want.
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Amazon’s 48-hour-long Prime Day is here, which means the company is pulling out every trick in the book when it comes to marketing its members-only promotions. Its homepage is blanketed with ads for discounted Fire TV Sticks, Tide Pods, and Purina dog food, along with celebratory banners to remind you that this is a special occasion — and that while it may be Amazon’s birthday, it’s you who’s getting a gift. (So generous, right?)

This framing isn’t unique to Prime Day: It’s the same tactic retailers use to market their promotions tied to just about every other holiday on the calendar, from Black Friday to the Fourth of July.

“The key to sales is that people think they’re getting something,” says Robert Schindler, a professor of marketing at the Rutgers School of Business Camden who studies pricing and consumer behavior. “And so it’s in the interest of the store to reinforce that idea that this is a gift to customers.” If shoppers believe they’re profiting from a deal, they’re more likely to snap it up.

Looking at the bigger picture, though, he says, it’s not necessarily the case that shoppers who take advantage of discounts are benefiting from them. This is because we often buy products on sale that we otherwise wouldn’t have purchased, leaving us with less money than we started with in exchange for items we don’t actually need. Sales are designed to make us feel like we’re getting free money — which, of course, makes us feel good — but if we weren’t going to buy the products anyway, this isn’t actually what’s happening. As long as we think we’re the ones getting the gift, however, retailers will continue to clean up from sales events. (Prime Day alone brought in an estimated $3.5 billion last year, according to the e-commerce software company Zentail, and that was before Amazon extended it to a full two days.)

Also key? Keeping sales contained within a limited time frame so that shoppers feel they need to act or else risk missing out on a good deal. Call it the principle of scarcity, call it FOMO — when we feel like something might become unavailable to us, we tend to think of it as more valuable. It’s the same reason retailers will include language like “while supplies last” and “just a few left in stock” to persuade customers to make a purchase. The threat of losing something is a powerful motivator in human psychology, outweighing even the prospect of an equivalent gain — so even if you maybe don’t need that pair of noise-canceling headphones, the fear of missing out on the $50 discount might be enough to make you hit “buy.”

”Some people feel that when a discount is offered, it’s like money lying in the street. They can’t not pick it up and take it. There’s a compulsive aspect to it,” says Schindler.

Nowhere is this principle deployed more obviously than on Amazon’s Lightning Deals page, which features a rotating assortment of thousands of products that are on sale for only a few hours, and only at limited quantities. To reinforce their scarcity, Amazon includes both a countdown clock and a widget showing what percentage of the deal has been claimed.

A few hours before the discounts go live, shoppers can check out the items and add them to watch lists to be notified when they go on sale. “This means that you’re going to have so many people that are obsessively checking the website throughout these days because there’s that element of unpredictability,” says Shikha Jain, a senior director focused on retail pricing and promotion at the global consulting firm Simon Kucher. “And then the side benefit of that is that once you’ve got online traffic, the whole point is to drive profits.” So when a customer adds a lightning deal to their cart, they might also take the opportunity to buy a full-price item or sign up for a service like Kindle Unlimited or Audible. (Both are running rock-bottom intro offers at three months free and 60 percent off, respectively, but will eventually drive $9.99 and $14.95 per month in subscription revenue.)

Amazon isn’t the only retailer that stands to benefit from a shopping bump this week, either: Target, Macy’s, Walmart, eBay, Best Buy, and Kohl’s are all running deals during what’s become summer’s answer to Black Friday. During last year’s Prime Day, Adobe Analytics found that sales at major retailers (those with annual revenues north of $1 billion) got a 54 percent lift. Target also announced that its competing sales event was one of its biggest online shopping days of the year.

It’s no surprise that Amazon’s rivals would want to get in on the action. For one, website glitches in past years have provided an opportunity for other retailers to scoop up some of the e-commerce behemoth’s frustrated customers. Also, many consumers are now accustomed to treating Prime Day as a shopping holiday, and Amazon’s competitors want to reap at least some of the rewards.

At the same time, there’s a careful calculus to promotions, and retailers don’t want to condition shoppers to anticipate deals every other week; otherwise, they’ll never buy at full price. Jain says this overreliance on promotions is one of the main struggles for the retailers she works with. “It comes to the point where once it’s expected by the consumer, it’s very hard to trigger a purchase without it,” she says.

Chains like J.Crew and Gap have been grappling with this precise issue for years now. Faced with increased competition from fast-fashion retailers, they turned to discounts as a shortcut to growth. Now, though, they’re paying the price. On top of cutting into profits, the strategy can quickly tarnish a brand, and it takes a lot of work, time, and money (which often these retailers don’t have much of) in order to build that back up in the customer’s mind.

Avoiding discounts all together can be equally treacherous, though — just look at J.C. Penney, which in January 2012 switched to an “everyday low price” model spearheaded by Ron Johnson, the then-CEO who had joined the company from Apple the previous fall. At the time, nearly three quarters of the company’s revenue was generated by products sold at a discount of 50 percent or more, and Johnson promised to get rid of the “fake prices” that made shoppers think they were getting a deal, when really items were marked down almost the minute they hit the sales floor. The plan backfired: Sales dropped 25 percent in 2012, to $13 billion, and the company’s stock sank from the mid-$30 range to the high teens. (Today, it’s dropped to just over $1.)

Johnson admitted on a call with investors that “Coupons were a drug. They really drove traffic.” But while Penney reversed course by the end of the year, it was too late to draw the bargain hunters back to the store.

“If I anchor you to a higher price point, then anything that is slightly below that feels like a great deal,” says Jain. “Versus if I anchor you to a low price point, then going higher makes it look like a worse deal.” Just using the words “sale” or “special” can make consumers perceive an item as higher value, so long as they believe the discount is temporary, according to one study.

Retailers, then, are bound to get drawn into the promotion cycle, and the imperative of competing with a colossal force like Amazon makes the process even more inevitable. But does that mean we have to get drawn in too?

Schindler thinks there’s another way — it just requires putting more thought into what you actually want, rather than getting distracted by the psychological rush of the deal. When you start paying attention to that, he says, “you end up buying things that you wouldn’t have bought anyway. And that’s why promotion is so incredibly profitable for sellers. They can’t exist without doing it. But from the standpoint of the buyers, you can do very well, thank you, by just ignoring all discounts and buying what you want.”

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