When a Sale isn't a Sale

I love wine. For my birthday this year my wife took me to a really nice wine tasting where I got to sample wines from around the world and learn some simple wine-tasting techniques (in addition to trying absinthe, I love living in Europe). Despite all of that, I'm also a cheapskate and hate to pay too much for wine. So when I go to the supermarket and I see a wine advertised "HALF-PRICE" at 4 GBP (about $8), I'm obviously interested.

This, of course, raises the question of why the supermarket would be selling the wine for "half-price". In a strictly economic sense there are only 3 reasons why you could ever buy something at a discount.

1. The product was over-priced to begin with
2. The product was over-stocked and inventory needs to be reduced
3. The losses I take on this sale will statistically be offset by greater economic gains from getting you in the store

Realistically any of the above three are possible. However #2 is a result of an error on the part of the company and should only happen every once in a long while. Since I see wine for half-price every single day at every single supermarket, I have to assume that they aren't over-stocked.

That leaves two possibilities, first that the supermarket is willing to take a loss to generate business, either by hoping that you'll do all your other shopping there (very possible) or by taking losses to drive other wine sellers out of business (also possible, but illegal). Or second that the supermarket is deliberately over-pricing the wine so that it can make glitzy sales that attract your attention.

As it so happens, the reason (at least according to one british financial website) is the second:

The practice of 'marking up, only to mark down' has been rife for years, according to industry experts. The supermarket pretends to be offering a 'great discount' on a £7.99 bottle of wine, but the real price of the wine is £3.99.

This strategy works only in fields where things are remarkably unique, such as wine or clothes. In those fields, value is very fuzzy to begin with, so it's hard to understand when something is very over-priced. If you tried that strategy with cars, people would think you were awfully weird for first listing your Honda Civic at $30,000. And then offering it at $15,000 and claiming it was "half-off". That's because consumers have a fairly good idea of what a Honda Civic should cost.

Is real estate one of those fields in which a "sale" works, or isn't it?

I ask that because one of the first things I see in real estate advertisements in the US these days is "REDUCED!!!!!!!". Is that a good indicator or a bad one? Looking above to our earlier list it's obvious that the seller isn't overstocked on house and needs to make room, that argument doesn't hold in real estate (unless you are talking about builders, which is a very different story).

It's also obvious that the seller has no way to make back a loss from you if they sell under-market. In other words a person who is selling a house is probably looking at it as a one-time transaction. So there is no economic reason for them to purposely take a loss just to get your business.

So the last point remains. The reason 99% of REDUCED!!!!!! homes had their prices dropped, is almost certainly because they were over-priced to begin with. To me this is a negative indicator, because the seller and the agents seem to be fishing out-of-their-league for a greatest fool, not looking to sell at a honest value.

But still, the word "sale" brings on positive reactions even when we cognitively know better. Even knowing that the wine really isn't on sale, I still find myself more likely to buy the wine that's "half-off" than wine that isn't (but has the exact same price). and my very intelligent wife, even knowing that those boots aren't really worth $400, still sees the "$250 off" sign and thinks "bargain". Maybe we are just wired that way.

So maybe you should consider using the word "reduced" in your home sale advertisement. It won't impress buyers who are using their heads, but it will call out to all buyers that maybe, just maybe, there's a bargain to be found here.