Taxing times
I’m in Kyoto on vacation with my girlfriend. As well as visiting as many sights and eating as much Japanese food as possible, she wants to go shopping. This makes perfect sense; Japan offers a singularly fabulous retail experience. With the exception of my disappointment at being unable to buy any of the iconic selection of locally designed Converse because they don’t generally stock shoes in my size (13 US), it’s a shopper’s paradise.
As if we needed more reasons, the Japanese government currently has a campaign to promote Japan as a Tax Free destination for tourists, There are signs everywhere announcing this fact, with its own logo. As ever in Japan, its a masterpiece of design.
The behavioural scientist in me is bemused and wants to channel my inner Dan Ariely; for the uninitiated, he’s the co-author of a rather good book called Dollars and Sense (or Small Change in some countries) that explores quite how irrational we can be when dealing with money. You can read an excerpt here in which the authors explain how shoppers reacted when JC Penney, a US retailer renowned for heavy discounting, switched to a policy of not doing so, whilst maintaining the same level of overall pricing.
Spoiler alert: they don’t like it at all; in fact they’re more focussed on saving money than on the absolute amount they’re spending. Probably something I should think about when I’m presented with the opportunity to reclaim tax.
Obviously offering me a tax rebate is an attempt to persuade me to spend money I wouldn’t otherwise; but is it effective? Presumably the Japanese government thinks it’ll have a net positive effect; either encouraging more visitors or more spending by existing ones.
The scheme works by offering tourists a tax rebate on individual purchases above ¥5,000 (just under US$50). The standard tax rate is 8% so it basically means that for any single purchase with one participating retailer above that limit, you don’t pay tax.
Sounds simple, right? Well it is…and it isn’t.
On the face of it, the ¥5000 limit is a nice round number which is cleverly positioned to be achievable by most shoppers. Yet it’s probably more than many people (ignoring high rollers for whom tax is likely to be a marginal consideration) will ordinarily want to spend in one purchase. And 8% is almost 10% isn’t it, so there’s probably an element of rounding up that goes on when calculating the savings we’ll be making.
Where it works really well (for the retailer) is that tourists attracted by the discount are likely to focus heavily on buying things that get them a tax saving. By pricing individual items cleverly just below that limit, in what I’d call the “zone of doubt”, retailers can use the tax rebate to cunningly persuade people to spend “that little bit more” to get over it.
There’s also a fabulous psychological trick at work here. Unlike most other retail offers, this one changes the purchasing dynamics. Because the source of the discount isn’t the retailer but the government, it is no longer about whether the retailer can do a deal with the customer. Instead the retailer shifts from counterpart to ally in a game that involves getting money from the most hated part of any government, the tax authority. We all like getting one over on them; even if it’s not a government to whom we’ve paid anything beyond consumption taxes.
The ¥5000 limit is also deceptive. Imagine you’re in the “zone of doubt”; how much extra should you spend? It’s not immediately obvious. Here’s the answer: you should only spend more to save tax if you’re already spending ¥4630; that’s the level at which your total expenditure will exceed ¥5000 inc tax. (¥5000/1.08 =¥4629.62; rounded up). This took me time in a darkened room to calculate, not something I’d work out in a neon-infused store with a shop assistant on my shoulder in the midst of what Germans call Kaufrausch. Yes of course, there’s a German word for the high that comes with a shopping spree.
The average shopper will understandably focus on the ¥5000 as a psychological anchor point that has no bearing on the price they ought to be happy to pay for any individual, or combination of, items. Yet the chances are the closer a customer is to being just under that price point, the harder they’ll feel compelled to go beyond it to save tax. Which might not be logical at all.
Then add in the fact that goods are stickered with the pre-tax price (a legal requirement that’s not entirely inconvenient for retailers) which means that all that happens when you take advantage of the offer is that you’re paying the price displayed. A beautiful piece of behavioural science trickery that ends up with you spending more money than you’d originally intended. You had me at tax free…
Unless, of course, you’re spending well above ¥5000 at which point there is definitely a discount to be had. As long as the item is reasonably priced in the first place and you really want/need it. This requires you to correctly calculate the exchange rate and have a means of paying that offers you the actual rate you’ve used; which, let’s be honest, is likely to involve a round number for ease.
Four Eye Checks
As if the tax trickery weren’t enough to contend with, I have my own personal cognitive blindnesses.
My girlfriend now tells me that she wants to buy some glasses. I’ve decided, based on nothing beyond pricing prejudice, that Japan is not the place to buy them because they’ll be expensive, so I’m totally disinterested. And she knows it. Double fail there.
Fortunately, she’s smart enough to ignore me. Whilst navigating Kyoto train station, we come across a really cool looking glasses store (trust me these aren’t just opticians!) and go in. She books an eye-test and whilst waiting ‘eyes up’ a few pairs, pick one and goes off for her test. Literally a few minutes later, she’s back, having not only had the eye test but paid for her new glasses. Total cost ¥5,000; yes you read that right. Including the eye test, frames and lenses. With 6 months to go back and change any of it at no charge, if she doesn’t like it. What’s more it’s a bargain that plays absolutely no games with the tax free limit; it’s bang on it! To complete the experience we can pick them up in 30 mins.
At this point, something in me flips. Because I really hate going for eye-tests. In fact I’ve not been for once since 2011. My cognitive biases are in full effect here; Wilful Blindness means I don’t want to go and be told my eye-sight is worse than it once was. Confirmation Bias tells me that this process will take a long time, require me to confirm my own physical disability and will inevitably result in the salespeople trying to sell me contact lenses and other products. I’ll end up spending a fortune only to feel awful.
In spite of myself and under encouragement from my girlfriend who displayed her own Confirmation Bias (“I’ve done this so I can make myself feel better by persuading him its worth doing”) and played to my Social Bias (“she’s done it so it must be good”), I try some glasses and book an eye test. In a repeat of her experience, in less than 5 mins my own glasses are being put together and will be ready for me in 30 minutes.
I’ve literally gone from “why am I here?” to “I’ll have those please” in a product segment I was avoiding, within 5 minutes. 30 mins later we collect our glasses. We’re both thrilled with the result. If, dear reader, you’re interested in the retailer’s name, I’ve posted a link at the bottom.
And that ladies and gentlemen is the Human Risk lesson here. I’m totally irrational when it comes to something as simple as shopping.
The reason I didn’t want to go for an eye test (in the UK) was the fact that I hated the process. Both the test and the resultant sales performance that involves being sold things I don’t want. And then there’s the money involved which is never cheap. This was quick, simple, customer focused value for money. Plus they’ve turned buying glasses into an impulse purchase.
Which brings me to the point of the blog. Firstly it’s to note that tax free is not always that bargain it seems.
Secondly, go have an eye test. My reasons for not going were terrible and it’s important. Be less like me.
Thirdly, Dan Ariely is right. I’m nowhere near being anything approaching a rational shopper. So, dear reader, never let your biases stand in the way of a good outcome. Whether that’s Confirmation Bias (“saving tax means spending more money is always right”, “glasses are expensive”, “the test will take ages”), Wilful Blindness (“I don’t want an eye test because it’ll tell me I’m more blind than I thought I was”) or Decision Fatigue (“I’m tired so can’t be bothered to do this”, “reclaiming tax is hard work”). Although they’re evolutionary instincts, each one of them worked against me.
Luckily I’ve got the best form of mitigant to this: a girlfriend who is a strong influencer in my decision making. I may have my biases, but she helps bring a diverse perspective to them. That, behavioural science and common sense tell me, is more likely to deliver a better outcome for me as an individual. Just goes to show the importance of a four-eyes check. Pun fully intended.
I’m not going to show you a picture of me in my new glasses. Because, let’s not forget, the primary objective of having glasses is to improve my eyesight. You need to see things through my eyes. So to prove how amazing they are, here’s what one of Kyoto’s sights looked like without my new glasses:
and here’s what I saw with them:
No comparison, right? For those of you interested here’s an article about Jins, the company we went to.
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