How price shopping leads to overspending
Think a budget is all you need to make smart decisions on big purchases? Research says you're wrong. Here's how to do it right.
This post comes from Angela Colley at partner site Money Talks News.
It can happen when you budget for a purchase. In fact, consumers who start shopping with a price in mind spend up to 50% more than those who don't, according to researchers from Brigham Young and Emory universities. And if you're buying expensive items this way, think of all the money involved.
What goes wrong
You decide you want to make a purchase -- a household appliance, a laptop or a TV -- and you select the maximum price you'll pay. Because you have a budget in mind, your thinking goes, you won't spend more than you planned.
But, the researchers found, it doesn't work out that way.
Brigham Young University explained how the study was done:
Experiments tested consumers' thinking about buying televisions, pens, laptops, earbuds, garage doors, mattresses, Blu-ray players and luggage. Various approaches got shoppers thinking about price -- they could select a target price from a set of choices, identify their own target price, select a maximum price they were willing to pay, or determine a budget for a specific purchase.
"The results were always the same -- a preference for higher-quality, higher-priced items," said study co-author Jeffrey S. Larson. "The most surprising aspect of this study was that people's decision-making process can change so easily. Doing something as simple as asking, 'Hey, how much would you budget for this product?' completely changes their thinking."
Once the shoppers had a set amount in mind, they stopped thinking about price and focused on quality. As a result, they overlooked less-expensive items that met their needs in favor of ones with more bells and whistles.
From the university press release:
For example, in one of the experiments, the researchers asked a group of consumers how much they would be willing to spend on a new TV. Those consumers were then given the option of choosing a TV $18 above their target price and a lower-quality one $18 below. About 55% of them chose the higher-priced option that was above their target price range. But among a set of consumers who were given the same options WITHOUT being asked how much they would be willing to spend, only 31% chose the higher-priced option. Those who set a maximum price first also rated the difference in quality between the choices as much greater than those who didn't.
You might be doing the same thing and spending more than you want or can afford. But there are ways to counteract it.
1. Set your budget anyway
It may sound counterintuitive, but you still need to know how much you can afford to spend. Another tip: For smaller purchases, plan on paying with cash.
2. Choose your features
Before you shop, decide what features are important to you. Read product reviews. If you know exactly what you want before you walk in the store, you may be less likely to be distracted by an upgrade.
3. Return your focus to price
Once you think you've made a decision, focus on price again. Is this really the model you want, or is there one that satisfies your needs and has a lower price? The university explained:
The researchers found that the effect disappeared after consumers had their attention drawn back (to) price after they had evaluated quality. "Just knowing that the effect is there is going to be enough for most consumers to be able to overcome it," Larson said.
Don't forget the basics of saving money on everything. Before you buy, comparison-shop; prices can vary widely from store to store. And once you find a deal, don't be afraid to ask for a lower price.
To save some time, try a comparison-shopping website like:
Can you recall a time when the effect described by the researchers caused you to spend more than you had planned?
More on Money Talks News:
- The simplest way to save on everything
- 10 ways to get the absolute best price online
- The 10 golden rules of saving on everything
That's ridiculous. There are clearly those of us who delay gratification if the price isn't right. I've wanted a 50" HDTV for a couple years but the price isn't right. I bought a 32" one for $188 that will become my gazebo's TV when I build it in the back yard and the price of 50" 1080p HDTV's com down.
I researched off and on for a lot of 2012 what I wanted in a new car and paid $16,125 MSRP - $552 mark down for a Honda Fit base automatic.
I wanted a new laptop but waited until I found a refurbished HP Pavilion g7 for $399. I paid $100 for a refurbished Magnovox DVD/VHS player burner that picks up broadcast TV and converts VHS tapes to DVD.
I bought a 2"x2"x4" Camcorder for $275 at Amazon that listed for $525. I bought a Garmin Forerunner 305 Watch - hard to find under $300 - for $135.
The results are "always the same"? Ridiculous!
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.