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How initial discounts can get you hooked to a product or service

  • Unsustainable initial ‘deep discounts’ are typically meant to tap into behavioural biases that people have
  • Once lured in by initial discounts, people might stay because they’re simply unwilling to make the effort to switch

Last month, the #LogOut campaign led by the National Restaurant Association of India (NRAI), made waves as a number of restaurants delisted from platforms like Zomato, citing the difficulties they face because of the deep discounts such aggregators offer. However, customers didn’t take to the campaign kindly and reacted on the social media with annoyance. For them, it meant missing out on great deals and offers, or even making a “loss" because they had already paid for a year-long offer or pass.

But this is only a symptom of a larger problem. Given how much Indians love a good deal, sellers and service providers offer deep discounts, even if they are unsustainable, to attract more customers. The trend has only grown with the advent of e-commerce and service aggregator platforms. While saving a penny here and there is great, availing of discounts can become a habit, and can lead you to shop even when you don’t need to and also compromise on quality.

So why do we fall for discounts? The answer lies in several behavioural biases that are hard-wired into us. Read on to find out what draws us to deals and why it might not always be a good thing.

Why they offer deals

Retailers and service providers have always used customers’ desire for “getting a good deal" to make sales. Online platforms and aggregators have taken this to the logical extreme. “They offer deep discounts; firstly, to get new customers and then to keep them hooked on to their system. A major portion of this cost is borne by the service aggregator," said Gopal Gidwani, personal finance blogger, Bachatkhata.com.

This has had the desired disruptive effect on the market. “Consumers were not used to buying or ordering online. To change that, retailers and aggregators had to offer discounts and deals to convince them to switch. Even if discounts are rolled back or they start charging a small delivery fee, consumers continue to buy, because they get used to the service," said Rajat Wahi, partner , consumer business, Deloitte India.

But given how price sensitive Indians are, this does not work on all customers, “Discounts could be habit forming for brand loyal customers whereas it may not be of much use for price sensitive customers, which form the major share of the base in India," said Shilpi Johri, certified financial planner and founder of Arthashastra Consulting, a financial planning firm.

Gidwani agrees. “Some customers have brand loyalty, while others look for the best available offer and don’t think twice before switching loyalties. Once these offers are withdrawn, some customers continue using the product or service whereas some look for other offers elsewhere and some customers go back to their old ways of going to the merchant directly as they used to do earlier, bypassing the online service aggregator altogether," he said.

Why we buy into them

When big sellers or aggregators offer an unsustainable initial “deep discount", they are tapping into behavioural biases that people have. “There is a huge psychological entrapment when you see a slashed price. In psychology, it’s called anchoring. You show someone a price, then lower it significantly. The price is anchored in their mind to what they saw earlier, so there will be a huge temptation to buy it," said Amit Kukreja, founder, Amitkukreja.com, a financial planning website.

But that’s not where it ends. “It caters to the ‘transaction utility’ motive of customers as they are able to ‘score a deal’," said Brishti Guha, associate professor of economics, Jawaharlal Nehru University, New Delhi.

Also, people might stay because they’re simply unwilling to make the effort to switch. “People are prone to inertia or ‘status quo bias’. Once lured into using a product through deep discounts, they may not bother to switch. However, if there is reasonable competition in the market (other competitors for Zomato exist, for example), customers can switch to other platforms if the first platform withdraws its discounts," she added.

But, according to Guha, membership packages which require an initial payment with certain continued deals in exchange would prevent customers from switching. “Customers would want to ‘cash in’ on the benefits of the membership package which they already paid for, operating on the sunk costs fallacy, because of which they use the services of the aggregator more than they otherwise would have, since they feel they need to justify having paid a membership fee," she said.

What you should do

According to Gidwani, customers should be careful about subscribing to long-term plans like yearly plans from service aggregators. “If a restaurant pulls out of an offer, the customer cannot force them to honour it, as the offer agreement is between the restaurant and the service aggregator. The customer can at best get a refund from the service aggregator or file a complaint against it," he said.

Kukreja agreed, “Let’s say you sign up for a deal because you don’t want to miss it, even though the product or service is supposed to come later. If the seller or service provider goes bust or withdraws the offer, you should escalate it to a regulator," said Kukreja. “As consumers, we have to be wary of giving them lump sums in expectation of a continuing service model," he added.

Citing conventional wisdom, Gidwani said, “If an offer seems too good to be true, it probably is, and customers should steer clear of it," he said.

Choosing a product or service just because it offers a huge discount is an unwise idea. “Your buying should be need based, not discount based. Focus on buying discipline to overcome behavioural biases," said Johri.

Also it might not be a good idea to pay upfront to avail of benefits over an extended period of time because the offer can be rolled back for various reasons.

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