When Should I Use My Discount Coupon?

How we all use Transactional Utility Theory and Delayed Gratification to make our decisions.

I had to buy a tablet worth Rs. 18,000. My brother had a discount coupon of Rs. 3000 that he could avail now or we could use it to buy many products from brands that are usually a little on the expensive side. To make this decision, I realised we actually used the concept of Transactional Utility to figure out how much satisfaction we could derive from the two decisions.

Decision 1:

Use the coupon now and buy the tablet at Rs. 15,000 instead of Rs. 18,000.

Decision 2:

Save the coupon to buy clothes, body care items, and other lifestyle products from brands we usually don't buy from but would be our first choice if the prices were lower. Suppose the alternative is to buy 4 items worth Rs. 800 each.

Now, there are two utilities here that come into play, Acquisition Utility and Transactional Utility.

Acquisition Utility is the economic gain or loss of the transaction whereas Transactional Utility is the satisfaction that a person gets from the perceived value of the transaction. It is the difference between the price that is actually paid and the price you expected to pay, i.e., internal reference price.

Here Acquisition Utility is 3000 on both while the Transactional Utility is a discount of 16.67% on Decision 1 (3000 on 18,000) compared to a discount of 93.75% on Decision 2 (3000 on 3200). The discount feels much more when I buy many small items for less.

So I should choose Decision 2 and save the coupon. But I didn't because the concept of delayed gratification came into play. Delayed gratification is the ability to delay immediate small rewards in favour of larger rewards that we get by delaying our consumption. Psychologist Walter Mischel in his study found out that most people have the inability to delay gratification. This is because even when the actual value they receive may increase overtime, the perceived value for that particular reward decreases as the delay increases.

In my decision making I realised that I don't need those clothes, body care items or lifestyle products right now. What I really need now is a tablet. So if I were to save the coupon, I would wait for the ideal time to use the coupon. For most of us, that utility withers over time and we end up buying things we don't need at the time just to use the coupon.

Finally in my case a third factor came into play. Whether the demand I have is pre-existing or created? I closed my decision with the final question- did i really have this demand for those products before I knew I had a coupon or did this demand get created just now?

For those people who buy those products regularly, saving the coupon and receiving higher Transactional Utility in the future would be the ideal way to go. But for me, it would be better to spend the coupon on a demand that I had than a demand that I may or may not have had if the question of the coupon did not come into play. So it's better to get an immediate utility. I went with Decision 1.

We all use this reasoning. And the interesting thing is that, all this is a 30 second activity in our brains when we make these decisions. So we're all Econs, the Economists simply theorize the systematic logic behind our intuitive actions.

(Note: Transactional utility is derived by behavioural economist Richard Thaler from psychologist and economist Daniel Kahneman and psychologist Amos Tversky ‘s Prospect Theory. Delayed Gratification was popularized by psychologist Walter Mischel in his famous Marshmallow Test.)