The last couple of quarters have been tough for retailers and consumers both because of high inflation and interest rates. The growth has slowed down and IIP numbers are disappointing. Festival season is a good time for the retailers to appeal to customers with discounts and schemes. The consumers too look forward to avail the discounts on offer. The festival season is considered auspicious for shopping too which adds to its attraction.
Discounts and schemes
Festival season discounts comes in two ways; one, the cash discount where the retailer cuts the price by a significant amount and sells cheaper; two, the retailer provides a loan to buy goods at an easy EMI. Typically the interest rate is zero.
Cash discount is easy to understand and is offered by all retailers, big or small. Buy one, get one free is one such discount. 50% off on your purchase is another type of cash discount. Buy one get 50% off on second item is another type. These types are easy to understand. The discount is also immediate. Hence this is most attractive to consumers.
Loan discount, EMI facilities, and zero interest rates are generally offered by big retailers because offering such discounts need an infrastructure with banks and credit card companies. Discount with zero interest rate, easy EMI, and pay by credit card and pay back to credit card in instalments are types of discount where cash flow is not immediate. The saving is not very apparent. Let’s understand this with an example
Understanding the real cost behind the discount
In cash discount, if you buy an iPad worth Rs. 30,000 with 10% discount, you have to pay Rs. 27,000 immediately on purchase. This is straightforward to understand.
The case of 0% and easy EMI is a little complex. Let’s understand this with an example.
Suppose you buy the same iPad worth 30,000 on zero per cent interest. The processing charge is 1500. You can pay Rs 30,000 by paying Rs. 5,000 every month for next 6 months. This looks pretty easy. You got Rs. 30,000 loan without paying any interest rate. However, you have paid Rs. 1500 which is 5% of the amount for 6 months. Essentially, the cost of loan is 10% per annum.
You can also look at it this way. The price of iPad is actually 27,000 if you pay cash now but 31,500 if you avail easy EMI scheme with 0% interest. The price differential is Rs 4,500. This is the extra price you pay for availing the easy loan on Rs. 27,000. This means you are going to pay 16.66% extra in 6 months. This can be taken as cost of availing the 0% interest rate. This also means the annual rate for this loan is 33.33%. Here, the time value of money is ignored to make it simple to understand.
Important points to keep in mind
Festive season is the time when most of us open our wallets without giving a second thought on whether we need the things, which we are going to buy. Impulse buying is a fancy term defined by marketers to explain the behaviour of wasting money. Additionally, retailers create an aura around shopping which can easily tempt people into buying. Hence, it is important to make a list of shopping items beforehand. This will save buyers from spending money on unnecessary items.
Festive season is a good time to buy items that you have to buy as there are quite a few good discounts to be had. For example if you have been thinking to buy the LED TV, this could be the right time as you are likely to be pampered with heavy discounts.
Package discount is another very good way to buy many items sold in a package. For example, TV, VCR, and washing machine can be sold in a package for a certain amount. However, do not buy if the bundle has any item you already have at home and do not need.
Shop around to find the best deal. There are many retailers now who offer discounts on the same things in varying degrees. Reliance retail, More, Big Bazaar, and many malls offer discounts and schemes on a host of things. Shop around for the best deal and buy from there.
Finally, use your card judiciously. Credit card is not free money but the most expensive money.