Mathematics for Business and Personal Finance

Chapter 6: Cash Purchases

Business Math in Action

A Good Deal or Just a Good Ad?

Have you ever noticed the newspaper ads where a shiny new car is listed for sale "below cost" or "below invoice"? Suppose you went to the car dealership to buy that particular car. What if the dealership never had that car in stock in the first place? Then the ad would be a bait-and-switch scheme. Bait-and-switch is among the strategies retailers use to attract customers.

It is against the law to use bait-and-switch. This is when a store purposely advertises an item it does not have, then offers the customer another item that is "just as good." Although most stores avoid bait-and-switch advertising, they do use the following pricing tactics to draw customers in.

Loss leaders. A loss leader is an item sold for less than what the store paid for it, in the hopes that customers who come in for the bargain will buy other goods as well. The total purchase will make up for the amount lost on the loss leader. Loss leaders tend to be items people buy on a regular basis, like milk. Most people know how much milk usually costs, so if it is priced especially low, people will instantly recognize the bargain. Loss leaders are often placed at the back of the store so people will first have to walk past many other products.

Razor-and-blades pricing. This pricing method gets its name from the way razor handles and blades are sold: the handles are cheap, but the disposable blades are expensive. The strategy works with products that need replacement parts, such as printers, or with products that are used and DVDs, so the printers and DVD players themselves can be priced tantalizingly low.

Low-margin products. This is the opposite of razor-and-blades pricing. Here the replaceable items are priced very low but the product required to use them is expensive. Example: Downloading iTunes is cheap, but iPods are costly. Another type of low-margin pricing would be carpet-cleaning services that offer bargain rates for cleaning three rooms but charge much higher prices for additional rooms, spot cleaning, and area rugs.

Guaranteed Lowest Price. Some stores advertise that if you can find the same product anywhere else, they will match or beat that price. The catch is in the word same. Mattress dealers are well-known for using this strategy. Try to convince a mattress dealer that you found the same mattress at another store, and the dealer may tell you that the other mattress is not exactly the same. The very same mattress, made at the same manufacturing plant, may have five different names at five different stores. That makes it impossible for consumers to compare prices from store to store.

Businesses need to advertise to attract customers. They have the right to do so as long as they are not lying, but you still have to be careful. Learn about how products are priced and advertised, and you will be a smarter shopper.

English Language Arts/Writing

Advertising Strategies

Imagine that you see in the newspaper an electronics store's ad showing a brand-new laptop computer being offered for hundreds of dollars less than at other stores. However, you see in small print next to the offer, "One at this price." What a short paragraph explaining the advertising strategy the store is using, and what you think would happen if you went to the store to buy the computer at the advertised price.

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