Learning to Discount All Those Juicy Discount Offers

Sometime this fall, Target (NYSE: TGT - News) will begin offering a 5% discount to customers who use its credit card for their purchases at the chain. So is this a good deal—or not?

Just about every discount offer raises the same question, since it is genuinely difficult to assess what a fair price really is. In most cases, discounts are intended to entice us to spend more, not less. Target says, for instance, that it hopes its offer will prompt its "better and best" customers to buy more at its stores, boosting its sales.

Therein lies my conundrum: My family buys most of its groceries at SuperTarget, and we spent close to $5,000 at the chain's discount stores in 2009. So the offer would save us money—close to $250 a year—and I might be able to avoid trips to other stores.

Switching cards, however, would mean giving up the benefits of our travel-rewards card, which we estimate are worth $80 to $100 a year on our Target purchases. It also requires carrying around another credit card, paying another bill and—worse—trying to resist the temptation to buy extra, unnecessary stuff because of the discount.

While saving money is important, many discount offers have a darker side. Here are some of the ways we get lulled into thinking we are getting a good deal when we may not be:

• Membership has its delusions. In a 2007 paper on membership fees such as those charged by Costco (NasdaqGS: COST - News), Harvard Business School professor Michael I. Norton and Columbia Business School professor Leonard Lee found that consumers equated the fees with especially low prices, even when the prices weren't all that great. Assuming they were getting great deals, shoppers tended to stock up, spending more than they planned and buying "enough pasta to outlive a nuclear winter," according to the professors.

When we pay for something in advance, we want to get the full value. So those who subscribe to Amazon.com 's (NasdaqGS: AMZN - News) Amazon Prime service, paying $79 for a year's worth of two-day shipping, are more likely to spend more on the website, just as we might pig out at an all-you-can-eat buffet.

• Loyalty is expensive. My own wallet is full of loyalty cards—Chico's (NYSE: CHS - News), Barnes & Noble (NYSE: BKS - News) and Staples (NasdaqGS: SPLS - News), to name a few—all intended to reward high-volume customers. The average consumer belongs to six such programs, says Joseph Nunes, a marketing professor at the University of Southern California's Marshall School of Business. Once we belong, we are likely to spend more to qualify for a coupon or earn cash back—and then forget to spend it.

"All loyalty programs count on a certain percentage of consumers not redeeming," Prof. Nunes notes. In addition, he says, "once you get closer and closer to a reward, you want it more and more" and may spend more to get it.

• Free is seductive. Various studies have found that many people will respond more positively to an offer that appears free, even if it really isn't. For example, consumers prefer a product that costs $5 and includes free shipping to an item that costs $2.50 and requires $2.50 to ship.

"When something is free, we have an overly excited reaction," says Dan Ariely, a Duke University behavioral economics professor and author of "The Upside of Irrationality." He marvels, for instance, at how long people will stand in line at Ben & Jerry's on free cone day. But he asks, "How much time would you spend in line to get $1.75?"

In fairness, it is hard to compare an ice-cream cone and cold, hard cash. A couple of years ago, Prof. Ariely asked about 50 people who were buying a car at a dealership what they would buy if they didn't purchase a car. Most didn't have an answer—and none of them saw the cost of the car as equivalent to, say, a tuition bill or multiple vacations.

Prof. Ariely says people should get more comfortable comparing apples and oranges—that is, an impulse purchase with something they truly value. Learning to weigh trade-offs is a good start to becoming a smart shopper.

So is making an extra trip to hunt for specials. Marketing professors Stephen Hoch, at the Wharton School, and Edward Fox, at Southern Methodist University, studied "cherry pickers," people who did most of their grocery shopping at one store, but then went to a second store the same day to take advantage of specials, such as soft drinks on sale. Even factoring in the extra time spent shopping, they found that cherry pickers actually can save big money.

Weighing the hassle involved also is important, of course, whether you are switching credit cards, surfing the Web for discounts or clipping coupons. When it comes to the Target card, I'm not yet convinced that the extra savings are worth the trouble.

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