The Hindu Business Line : The BOGOF effect

Consider this. You walk into a mall and find two stores that sell clothes. You can buy a shirt in the first store at Rs 750 and get one free. The other store sells the same shirt at 50 per cent discount to the marked price of Rs 750. Which store would you prefer? If you are a typical consumer, you would prefer to go to the first store, which gives you a free shirt. Why?

The human mind is attracted to anything that is free. "Buy one get one free" (BOGOF) is a marketing strategy to persuade people to buy things.

The alternative would be a price a product at 50 per cent discount. When a product sells at a discount, it is natural for us to suspect that it is defective.

We, therefore, do not prefer to buy such product, unless we want to go bargain hunting.

It was this behaviour at work that my friend and I saw at a mall recently, where one store was attracting the crowd because it had adopted the BOGOF strategy.

We display similar behaviour in the stock market. A one-for-one bonus share or stock dividend means you get one share free for every share held. There is great demand for stocks of companies that offer bonus shares.

Do bonus shares enhance your investment value? Not quite. The stock price represents the market's perception of the company's fundamental value.

When the company issues bonus shares, it gives additional ownership from existing value. It is similar to you having two small slices of pizza instead of one large slice of the same pizza. Yet, people like to buy stocks that provide free shares- because of the BOGOF effect.

(The author is based in Surrey, BC in Canada)

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