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It is summer holidays. The current season of IPL cricket is already here.
So, what better time than now to upgrade your old TV to a new-generation LED TV? But what will prompt you to do this?
Classical economics has a straight answer to the question. Suppose the net cost of buying a new LED TV is Rs 70,000 — the actual price of the LED TV minus exchange price of your old TV. You will buy the TV if the satisfaction that you derive from using it is more than Rs 70,000. Otherwise, you should learn to be happy with your old TV!
Abstract satisfaction
The problem, however, is that your satisfaction is abstract. That is, you cannot measure it precisely.
You will also agree that we do not always buy goods even if we can afford them. Because we want to buy more goods than what we can with our money.
We are forced to prioritise our spending. And LED TV may not necessarily feature high in the pecking order. So, what will make you buy the TV, which your family, perhaps, wants much more than you do?
The most important driver is your state of mind. If you received a flattering appraisal from your supervisor, you are most likely feeling good!
So, even if your wealth remains the same for now, you will spend in the anticipation of an increase in salary from the next month! The positive effect can also come from seeing your equity investments move up in value.
But you still need a nudge from the store to finally convert your positive state of mind into a purchase decision. And stores play their part well!
For one, stores have generous exchange offer, where you trade your old TV for a new one, paying the difference. For another, they offer free one-year extended warranty or one-year free subscription to cable TV!
We are typically swayed by free offers! Suppose there are two stores- one that prices the LED TV at Rs 72,000 and also offers a one-year extended warranty, while the other prices the same TV at Rs 68,500.
You will most likely buy the TV with extended warranty. Why? For one, you may reason that an extended warranty would be useful. After all, you are spending so much on a TV and an extended warranty will come in handy… just in case! For another, you were mentally prepared to pay Rs 72,000. Getting an extended warranty is, indeed, a bonus.
In short, a positive state of mind is typically essential to trigger your consumption decision, especially on luxury products.
(The author is the founder of Navera Consulting. He can be reached at enhancek@gmail.com )
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