Money Better Spent: Study Finds Suggesting Alternative Ways to Spend Money Affects Consumers' Purchase Decisions

New Haven, Conn., May 31, 2007 — It’s a scene that plays out in stores every day: a customer standing in front of a product display, frozen in indecision, trying to decide what to buy among the various options. As a new study explains, whether the customer is weighing plasma TVs or pairs of sunglasses, his choice can be swayed not by calling attention to details like product features, but to something he is not likely thinking about in the moment of decision – other ways he could spend his money.

Consumers do not spontaneously consider the opportunity costs of a purchase – or other ways the purchase money could be spent or saved – but can easily be prompted to do so according to researchers at the Yale School of Management, MIT, and Arizona State University. They found that once consumers are reminded of alternative ways they could use their money it significantly influences their choices, making them less willing to purchase a presented item and more likely to prefer the cheaper option when a choice involves a tradeoff between price and quality.

Even small prompts to consider opportunity costs can affect consumers’ choices. In one experiment, two groups of consumers were asked to decide between a $1000 stereo and a slightly inferior $700 model. For one group the price difference was left implicit, while the other group received the description “leaving you $300 in cash.” The cheaper stereo was chosen significantly more often when the price difference was explicitly noted. Merely describing the cost difference as surplus cash prompts consumers to consider other uses of that money – like having $300 to spend on CDs – that they wouldn’t otherwise.

“Consumers only focus on information that is explicitly presented to them. Although factors like the price difference between two items seem obvious, just mentioning it explicitly seems to dramatically change how consumers think about a purchase,” said study co-author Nathan Novemsky, an associate professor of marketing at the Yale School of Management and a fellow of the Yale Center for Customer Insights.

The study suggests several promotional tactics that manufacturers of low price brands can employ to promote their products more effectively. They can increase consumers’ price sensitivity by prompting consumers to think about the cash they would be left with by not buying a more expensive competitor’s product and highlighting attractive ways to spend it. For example, an automaker might promote a smaller, more economical car by emphasizing the new wardrobe of clothes the buyer would be able to afford by forgoing a more expensive model. Just a small reminder of the opportunity costs of their actions can dramatically affect their purchasing decisions.

Citation: “Neglect of Opportunity Costs in Consumer Choice,” Shane Frederick (MIT),
Nathan Novemsky (Yale), Jing Wang (Yale), Ravi Dhar (Yale), Stephen Nowlis (Arizona State).

The Yale Center for Customer Insights at the Yale School of Management provides superior insight and understanding of customers to enhance business and society. The Center welcomes inquiries from organizations interested in research partnerships and sponsorship opportunities. For more information visit http://www.cci.som.yale.edu or contact Eugenia Hayes at 203-432-6069.