Which Is Better: Getting More or Paying Less?

Here's an interesting question posed by Moneyland:

When offered the possibility of 33% off a product or the same product with 33% more quantity, which would you choose?

If you answered that there's not much difference between the two options (or something similar), you would find yourself smack dab in the same boat as most Americans. That's the main finding from a recent University of Minnesota study detailed in the Economist -- that "most consumers view these options as essentially the same proposition."

But they are not equal. One of them is a better deal. Moneyland goes on:

The discount is by far the better deal. As the Economist puts it, because most shoppers are “useless at fractions,” they don’t realize that, for instance, a “50% increase in quantity is the same as a 33% discount in price.”

The piece highlights a part of the study where students were asked to evaluate two offers on coffee beans. One offer had with 33% more beans for free while the other simply took 33% off the price. The students viewed the offers as essentially equal. But Moneyland shows how they are not equal:

But let’s do the math, using some easy round numbers for the sake of simplicity. Say the initial price is $10 for 10 oz. of coffee beans. Hopefully, it’s obvious that the unit price is therefore $1 per oz. An extra 33% more “free” beans would bring the total up to 13.3 oz. for $10. That $10 divided by 13.3 oz. give us a unit price of $0.75 per oz. With a 33% discount off the initial offer, though, the proposition becomes $6.67 for 10 oz., for a unit price of $0.67 per oz.

So why do consumers make this sort of mistake? Moneyland attributes it to the following:

• Shoppers do the math incorrectly.


• They are infatuated with the idea of getting something extra for free.

For those of you who aren't aware of it, "free" is the most powerful marketing word ever invented. Shoppers will do all sorts of things they might not otherwise do (including spending more money) simply to get something "free." Take it from someone who has been in marketing for over 20 years, giving away stuff for "free" can be quite profitable. :)

But the math part is strange. It seems to be an easy calculation. But for some reason, people aren't making it. Perhaps it's just the "lazy math" that says 33% more is the same as 33% off. Or maybe it's the fact that people assume that a larger-sized item is a better value. I know they often make this assumption when shopping at club stores. But if you do the math, you'll find that the larger sizes are sometimes a good deal and sometimes not.

We almost always break things down into a per-size equivalent (ounces, for example) to compare one item to another. And since we usually have our phones with us (which have calculators) this is quite easy. Why don't others do it?

How about you? Do you do these sorts of calculations or do you think the savings are so small that they aren't worth the effort?

Comments

[Oliver]

I find that a lot of people get into trouble when they focus too much on unit cost at the expense of cash flow. Even if you correct for the bad math in the above example, I'd still prefer a 33% price reduction over a 50% product volume increase.

Why? Cash flow. When I go to the store to buy shampoo, I expect to pay about $5 for a 16oz bottle. It lasts me about 6 weeks (I'm a dude with short hair). If given the option between spending $5 on a 24oz or $3.35 on the 16oz, I'd take the latter deal all day long, even though unit costs are the same. The savings in my pocket today can be used to pay down debt, invested, or added to the "fun budget" (thus preventing cost overruns in that oh-so-important category).

Cash is king, and I don't want my assets tied up in commodities.

[Luis]

I very rarely picnic or eat picnic items. On the occasions I need to buy ketchup or mustard I turn a blind eye to unit price and just grab the smallest container knowing full well I will not use it all up before its expiry date. Unit price is not important in this circumstance even if the find price of the larger item is a tad lower because then I'd be eventually wasting food.

In most other cases paying attention to unit price is part of being an intelligent shopper.

[Rick Francis]

Most people wouldn't do the math- especially since the problem statement makes them seem like they would be the same. The grocery store I shop at has the $/unit size printed on the price labels... so I usually just check that out. There have been a few instances when they use different unit sizes for different brands of the same product and I will do the calculation but I really HATE having to do it- shopping for groceries is bad enough without making me do unit conversion calculations!

-Rick Francis

[Mark]

I have seen major companies commit this pricing error - raising the price some percentage and then discounting the same percentage. They didn't realize that they reduced the price more than they intended to.

[Lance @ Money Life and More]

I normally look at the price per unit and if I can't figure it out right away in my head i'll break out the smart phone and do the calculation. Seriously :)