The Hidden Cost of ‘Saving’: How Retail Tricks Can Drain Your Wallet

July 4, 2024 (3 weeks ago)

The Power of Promotions

Have you ever bought something just because a website offered free shipping? What about falling for a buy one, get one free deal? Or overspending on a limited time offer? You probably answered yes because these tactics are effective and we all fall for them.

The Concept of Spaving

Repeatedly, in our consumer insights data, we see this high demand for promotions, for discounts, for value. It’s called spaving or spending more to save more. But it’s a financial pitfall that could seriously affect your wallet if left unmanaged. And it’s especially attractive to cash strapped Americans during high inflationary times. If you’re putting those purchases on a credit card that you can’t pay off in full at the end of the month, then you’re spending about 20% or more in interest, which will quickly erase any savings.

When Spaving is Justified

Spaving is not always bad. Like, for example, buying that coat off season to get a large discount. If it’s something that you actually need, particularly if it’s not perishable and it’s consistent with our goals, then spaving can be okay. It’s when retailers come up with ideas that you haven’t thought about, or buying things that you hadn’t considered creating that sense of FOMO, that sense of urgency is a really great trick to get people to act right away. I think the acute nature of offering the discount, if it’s limited time only, if it feels urgent or exclusive, that can really trigger the almost impulse. This is kind of a new wave of impulse shopping in some manners. And retailers strategize to get customers to spend more.

The Origins of Consumer Psychology

In fact, there’s a whole field of study devoted to it: consumer psychology. Many credit Sigmund Freud’s nephew, Edward Bernays, as a pioneer in the 1920s. He was one of the first to apply psychology to companies’ advertising campaigns, most notably for Lucky Strike cigarettes, where he likened the product to torches of freedom, helping remove the social stigma for women smoking. Basically, teams of scientists have figured out how to get us to spend more money, and it is working. That thrill of the hunt that came from prehistoric times still exists. Now, whether we’re online or whether we’re at a at a major retailer.

Increased Promotions and Their Effects

The opportunities to save are everywhere, from websites to subscriptions and even the grocery store. In fact, retailers have upped temporary price reductions by 72% and increased overall promotions by 15% in the past year, according to data analytics company Numerator. We tend to get that dopamine hit when we see something that’s a sale, and then we buy it and we feel like, oh wow, we really our hunting and gathering brains are just happy that we got it. And then two days later, we realized we didn’t even need this to begin with.

Impact of Inflation on Impulse Spending

A 2023 poll by Online Discount Hunter Slickdeals found that among those surveyed, Americans’ impulse spending has somewhat cooled due to inflation. But that shoppers were falling victim to deals more than before. We are spending more on impulse purchases than we have in years and since the pandemic, we are more tuned in to our favorite retailers. 52% of consumers surveyed by CI&T in 2023 ranked prices and discounts as some of the top reasons they remain loyal to a retailer.

Economic Pressures and Consumer Behavior

Sticky inflation continues to influence the way consumers shop, cutting into discretionary spending and pushing shoppers to hunt for deals. The consumer price index was up 3.4% in April 2024 year over year, but had a slightly lower increase from the year over year rise in March. That’s significantly less than 2022 pandemic era peak, but remains higher than policymakers’ long-term target of about 2%.

The Scarcity Mindset Post-Pandemic

While consumers have this really reactive mindset and cost conscious mindset, they’re also excited by the fact that inflation is coming down and they have this scarcity mindset still coming out of the pandemic, where they’re kind of hoarding a little bit. And when they see these deals, they think, oh, you know, during peak pandemic, I needed to stock up on items and I needed to collect the best deals and discounts because not everything was immediately available to me.

Rising Credit Card Debt

Americans have less savings in 2024 than a decade ago or during the pandemic, when consumer savings were at an all time high. But they’re still shopping by borrowing and falling behind. Credit card debt reached a whopping $1.12 trillion in May 2024. Up more than 13% from the prior year. 1 in 7 Gen Z borrowers have maxed out their credit cards, and more than half of Gen X carries a monthly credit card balance. More than 1 in 3 Americans have more credit card debt than emergency savings as of May 2024.

Long-term Impact on Credit Scores

For Gen Z, if they are close to maxing out their credit cards, that’s going to be detrimental to their credit score. They may not be so worried about their credit score at this point in time, but credit scores open the door to lower interest rates on everything from buying a car to buying a home one day, or even if you can get a loan at all.

Retailers Under Pressure

Meanwhile, retailers are also facing the pressure. Weaker retail sales for the month of April 2024 indicate that consumer spending is cooling. Retailers have really upped the game to make sure that they are selling off their inventory. So that leaves us as consumers, kind of victim to what retailers are doing just to do the straightforward math, whether you see $20 off of 100 versus $10 on 50, they may be the same, but the $20 of 100 seems like a better deal. We’re scrolling or we’re online. It’s already happened before we even know it.

Risks of Discount Strategies for Retailers

But these tactics can hurt business. For example, in fiscal year 2023, Under Armour missed fourth quarter gross margin expectations precisely because it used steep discounts to drive sales. It’s a fine line, and it doesn’t create a sustainable competitive advantage if you’re constantly just providing discounts on everything. And I also wonder when the consumer will have discount fatigue, at what point will they start to become so desensitized to these deals and discounts that it’s not ultimately what drives an acute purchase decision?

The Downside of Spaving

To put it simply, spaving is just another way consumers overspend impulsively, thinking they’re actually making a smart financial decision financially. It’s kind of like death of a thousand paper cuts. Those things add up, right? If you are making these discretionary purchases that you can’t really afford just to get free shipping or just because there’s a good deal, then it’s going to cause problems for you financially. If you are using spaving as a way to save money on something that you would have bought anyway, then it can work to your advantage.

Preventing Spaving

The best ways to prevent spaving come down to awareness: unsubscribe from promotional emails, stay away from tempting stores, and set a 24-hour waiting period to help curb unnecessary spending. But from a psychological perspective, cash is way better because you actually are physically spending it. You know, there’s an element that’s just so frictionless, but it comes to tapping your your card or using your phone to pay. It doesn’t seem real.

Navigating Economic Uncertainty

These are tricky economic times. Companies don’t want to be stuck with excess inventory, and consumers are fighting higher prices. So it works to your advantage to kind of wait for a deal. The best thing to do is kind of meet in the middle, buy the things that you intend to buy and need, but wait until there’s a sale.

Related Posts

Leave a Comment

Your email address will not be published. Required fields are marked *