Discounts On My Mind
By Craig Cowie & Justin Angle
Everyone loves a discount. How many times have you heard someone – perhaps yourself – say something along the lines of “look at how much money I saved” when buying something?
Of course, unless you absolutely had to buy the product, discounts do not save you money; they just reduce what you pay. But they also can change the way that you think about buying. When making purchases, especially significant ones like an education, a car, furniture or a major appliance, you must understand how the way something is priced – not just the final price – can affect your decisions.
We want to talk about two mechanisms that affect buying decisions – the price-quality heuristic and anchoring – and how sellers can use these mechanisms to affect your buying decisions.
The price-quality heuristic holds that a high price typically signals high quality. Sellers, however, understand how consumers connect price and quality and can use that knowledge to manipulate you. Generally, people compare the original price (list price) to the sales price. The greater the discount, the greater the perceived value. Knowing these effects, a seller can set high initial prices that influence consumers’ perceptions of the product being worth more than it is (a higher quality) or the deal (list price – discount) being better than it actually is.
Anchoring refers to the tendency of people to think that the first price they hear is the “real” price: prices lower than the initial price are seen as good deals and higher as worse deals. Thus, if a seller sets a high initial price and then offers a discount, anchoring creates a perception that the discounted price is a “good deal.”
Using these two mechanisms, sellers can interfere with consumers’ purchasing decisions. First, because consumers’ perceptions of quality are usually set by the list price and because the high list price anchors the consumers’ perceptions of what the price should be, the discount makes the purchase look more attractive than other options, even if the final price including the discount is higher than comparable products that do not have similar discounts.
For example, a handbag with a list price of $400 that is discounted by $100 may be seen as a better “deal” than a similar handbag with a list price of $250 and no discount, because the first bag is perceived as a higher quality with a final price that is lower than the anchored price.
Second, if the seller frequently discounts the list price, the list price may not be a real price and may therefore cause consumers to perceive the quality as higher than it is.
Buying higher education is one of the most significant consumer purchases people make, and people often take on significant debt to pay for it. According to the Federal Reserve, student loan debt in the United States exceeds $1.7 trillion dollars (almost $200 billion more than the total for auto loans). Although there are some differences, buying higher education is affected by the above principles just like the purchases of other consumer products. Indeed, scholarships in higher education can be particularly persuasive discounts, both because of the anchoring effect and because of the unique ways in which scholarships make the prospective student consumers feel.
First, university quality is difficult to measure and observe. Thus, students rely on price as a signal of quality even though it does not always predict actual quality. Many – but not all – students understand that public and private universities are funded differently, and thus do not assume that a lower price for a public university necessarily equals lower quality. However, because prospective students generally expect higher quality when they see a higher list price (the price-quality heuristic) and anchoring creates perceptions of a good deal, a university can exploit these mechanisms by setting high overall tuition and then granting generous scholarships. Additionally, an institution that grants more scholarships is typically thought to have more resources and therefore is perceived as more prestigious.
Second, scholarships often are seen as rewarding a prospective student based on merit or need, both of which are viewed as compelling signals that the student is wanted. Access to a higher prestige institution at a lower price is typically perceived as a special deal that the prospective student earned. Students receiving scholarships therefore feel special and are more likely to enroll. Further, once a scholarship is awarded, students feel an ownership of the scholarship that makes the prospect of losing it more daunting than the prospect of losing an equivalent dollar amount. Universities can take advantage of this fear of loss when raising prices over time.
So how can you, as a prospective student, counter the ways in which scholarships can interfere with your decisions? By applying the same decision-making process you would for any significant consumer purchase!
First, set aside the price and the scholarship/discount. Do you want this product (in this case an education from this university)? If not, move along and don’t be fooled into buying something you did not even want just because of the “change” in price. If you do want to attend, compare the available alternatives. What are the pros and cons for each? Are there differences in characteristics (e.g., in choosing a university, class size, campus type, professional opportunities might be relevant while terms and functionality are relevant for other products)? If so, are those differences that matter to you? Are there differences in amenities?
Remember, price can affect your perception of quality even though it is not always an accurate predictor of quality. Price can be a strong predictor for luxury goods, cosmetics, cars, electronics, and wine/spirits, but it is often a weak predictor for commodities like flour or sugar, pharmaceuticals, fast fashion, and regular household items. Because of the variability and lack of transparency in university pricing and the difficulties in measuring quality, price may not be an accurate predictor for quality in the university environment, but the heuristic still can affect your thinking.
Regardless, for any given product it is important to try to assess quality without referring to price, as the price may not equate to quality for that particular product even in those categories in which it generally is a strong predictor. Next, determine the final cost for each option, including available scholarships and fees.
Finally, consider whether the differences in the options are worth the differences in final costs to you?