Saturday, November 20, 2010

Open Post # 3 – Black Friday is Just around the Corner

To some people, Thanksgiving is a time where families get together and share what they are thankful for. To others, it means waking up the morning after to snag some Black Friday deals. From an economic standpoint, some might consider the opportunity costs associated with standing in long lines just to get a few dollars off some electronic device that’s probably been unable to sell without a substantial discount.

Whatever standpoint you take, it’s almost an American tradition to spend excessively on things they don’t need. What I’m trying to say here is, I’d assume that people end up spending more than planned because of a perceived discount. In other words, people purchase things because they are on sale. Because of the money “saved,” some psychological processes tells the consumer that they must now buy another “discounted” item with the money they saved. At the end of the day, you might go home with a bunch of things you didn't really need, but bought anyway because they were on sale.

In my accounting class, the following problem was proposed:
Assume that you have spent $100 on a ticket for a weekend ski trip to Big Bear. Several weeks later you buy a $50 trip to Mammoth. You think the second trip will be more fun than the Big Bear trip. A few weeks later you notice that both trips are on the same weekend. Since it’s too late to sell either ticket and you can’t return either one, you have to choose one trip. Which trip do you choose?

Most people who do not consider the “sunk costs” (those costs that cannot be recovered) usually choose the first trip that they spent $100 on. However, that $100 cannot be recovered, so it would be preferable to you to go on the second trip because you think you’d have more fun. However, the “sunk cost effect” psychologically manipulates the individual into believing if they don’t choose the $100 trip, they’d be wasting it. In reailty, the $100 would have been “wasted” either way.

This just goes to show that Black Friday is in some ways psychological. Marketers are always trying to find positive ways to position their products and prices in the most positive light.  In the end it seems that companies are always out to make a buck, and consumers are always out to save one.

Black Friday isn’t all bad. The day after Thanksgiving is deemed Black Friday because historically consumers go out and shop after Thanksgiving, putting retailers that were operating with negative profits (in the red), into the “Black.” In other words, it’s the perfect storm of economic stimulation and a consumer buying frenzy. Retailers like Wal-Mart have already begun to advertise their Black Friday deals. There is a sense of urgency this holiday season because Wal-Mart lost market share this quarter to other discount retailers. November and December is very crucial for Wal-Mart, as they expect to generate 50% of their sales and profits from these two months alone. Many other companies also rely heavily on this faux-holiday.

So as Thanksgiving approaches make sure to think twice before you buy an item you think you might need. Have a set spending budget so you are not left with an empty wallet or maxed out credit card by the end of the day.

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