Stores Profit On Customers Bad Math Skills

So how are your math skills? Retail stores are betting that they aren’t very good and are making a lot of money because of it. They have figured out that most Americans can’t figure out “double discounts” and customers are choosing them even when it’s too their detriment. In recent department store studies which will be published in the Journal of Consumer Research, stores that used double discounts were able to increase the number of people who purchased the item, their sales volume, their revenue and their profit.

Here’s a quick test to see how you would do. Would you rather have a 25% discount or a 15% off with an additional 15% off at the register? How about a 45% discount with 25% off and additional 25% off at the register? If you are up on your math skills, you should have picked the 15% – 15% in the first example, but the 45% off in the second example. Confused? Your not alone.

Most people who lack math skills look at the two percentages and add them together. On the 15% and 15% they assume they are getting 30% off which is better than 25% and with the 25% and 25% off they assume they are getting 50% off which is better than 45%. In reality, the first 15% is taken off the item on the floor and then an additional 15% is taken off at the cash register. For example, if the purchase was for $100, the price on the floor would be $85 and when the person took it to the register they would receive an additional 15% off of $85. This comes to $72.25 which is a better price than the $75 they would have had to pay for the 25% off, but not as good as the $70 they thought they were getting.

In the other example, the item would have been $75 on the retail shop floor with an additional 25% taken off at the register. This would’ve made the price of the item $56.25 instead of the $55 it would have been at 45% discount. Both of these are still much more expensive than the 50% discount that customers believe they are getting.

What this all adds up to is customers believing that they are receiving bigger discounts than they actually are. The study indicates that this is encouraging them to spend more money on more items with the result being the store making more profit.

It’s a good bet that you will see more and more double discounts in the future as stores build their profits on the lack of American’s math skills, so if your math skill aren’t strong, you may want to start bring a calculator.

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9 Responses to Stores Profit On Customers Bad Math Skills

  1. Michael says:

    It may be true that one discount is better than another, but I have yet to see a store that does it that way. No store I know of offers a choice of discounts, it’s just there, and that’s the discount.

    I know that I’m not getting as good a deal, but what am I going to do about it if I need the product?

  2. Traciatim says:

    What he was pointing out would be applied if two stores had the same item and one had a 45% off sticker and the other had a 25% off sticker, and a big sign on the counter “EVERYTHING 25% OFF AT THE REGISTER!!!111!One!”

    You may be inclined to shop at the 25+25 store because doing quick math in your head it would seem like you are getting 50% off vs 45% off when in fact you are not.

    If more stores start doing this and it works, then the idea will catch on.

  3. David says:

    Although I agree with your general conclusion, I believe your premise is wrong. As Michael said, no store does it that way. The key point is most people will take a mental shortcut and add the two discounts before multiplying the sum against the price, rather than multiplying the price against the discounts (which always results in a higher number). It’s like pricing something at 99 cents instead of a dollar; the psychological effect is thinking you’re getting a better deal than you really are. In other words, the store has to a) give up less money on every item in a sale to b) sway those people on the margin (and who also can’t, or can’t be bothered, to do the correct math) and boost sales volume.

  4. livingplanet says:

    a possibility, but don’t people use the calculator in their cellphone? the wifey and i usually do. we’ve actually become mentally lazy and so use the cellphone calculator…

  5. ToothCutter says:

    I’ve heard of these kinds of activities in the furniture and home-renovation stores. Especially the self-proclaimed ‘luxury’ stores.

    I’ve also seen people line up at recent CompUSA closure sales to buy duble-discounted items that still end up being more expensive than something you can pick up at Amazon or Newegg.

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  8. Alexa says:

    I remember a math teacher pointing out this same common mistake by asking the class to figure out (100 – 25%) + 25%. Most people assumed the answer was 100. It is 93.75.

  9. savila says:

    On May 17th 2007, David brought up the old $.99 instead of a dollar pricing scheme. I know that that theory was taught in college marketing classes as late as 1978. But please, you cannot convince me that the store marketers still think that us ‘sheep’ still believe that, do you? Unless all of their customers just got off the wagon from some place like backwoods Mexico, for goodness sakes!
    There is just no way that anybody at any level is believing that! Having said that, the fact that they still use that pricing acts only as an aggravation. And you cannot even choose to shop where they don’t dump alot of change in your pocket. The theory there being, once a bill is ‘broken’ the customer (more like “the mark”) is more likely to spend the change but not the bill.
    It’s such a shame that retailers, marketers and all still feel like they have to squeeze and trick every last penny out of us. I can’t blame them in a sense, our fine politcal leaders make such great examples, don’t they…the lack of social morality is so low its embarrassing to realize we’ve actually regressed in that respect-we’re doomed!Maybe I’m nieve but the frustration of being “handled” that way is degrading, demonstates such arrogance that it becomes intolerable! And I’m sure to a minor degree that added to citizen revolts in Europe at the time the revolutions started lopping off heads!
    Oops! I guess I digressed quite a bit there, sorry.

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