Last couple of quarters has been tough for retailers and consumers due to high inflation and interest rates. But with festive season round the corner, it is time for retailers to woo customers with discounts and schemes. Also, festival season is considered auspicious for shopping, which means there will be more buyers.
Discounts and schemes
There are two types of discounts available during the festive season — cash discounts and loan on offer.
In cash discounts, the retailer cuts the price by a significant amount and sells the goods at a cheaper rate. Then there are retailers who provide loans to buy goods at an easy EMI where the interest rate is normally zero.
Cash discount is easy to understand and is offered by big and small retailers. There are different types of discounts such as buy one and get one free, get 50% off on your purchase and buy one get 50% off on second item. These kinds of offers are easy to understand and the discount is immediate. Hence, cash discounts are 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. In discounts with zero interest rate, easy EMI, pay by credit card and pay back to credit card in instalments there is no immediate cash flow. 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 at 10% discount, you will have to pay Rs.27,000 immediately on purchase. This is straightforward to understand. In case of 0% and easy EMI, the math is a little complex. Let's understand this with an example.
Suppose you plan to buy the same iPad worth Rs.30,000 on 0% interest. The processing charge will be Rs.1500. You can pay Rs.30,000 in instalments of Rs.5,000 every month for next 6 months. This looks pretty easy. So you get 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 Rs.27,000 if you pay cash now but Rs.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.
Food for thought
Festive season is the time when most of us open our wallets without giving a second thought on whether we need the things that we are going to buy. Impulsive 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 the items. 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 available. 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 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.
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