Suggesting Alternative Ways to Spend Affects Consumers' Purchase Decisions

New Haven, Conn., December 1, 2009 – 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 study published in the December issue of the Journal of Consumer Research explains, whether the customer is weighing flat screen 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, Singapore Management University, 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, Professor of Marketing at the Yale School of Management and a fellow of its 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.

About the Authors 
Shane Frederick is Associate Professor of Marketing, Nathan Novemsky is Professor of Marketing, and Ravi Dhar is the George Rogers Clark Professor of Marketing at the Yale School of Management; Jing Wang is Assistant Professor of Marketing at the Lee Kong Chian School of Business, Singapore Management University; Stephen Nowlis is the AT&T Distinguished Research Professor of Marketing at the Carey School of Business, Arizona State University.