The amazing Miracle Blade knives last forever! Watch them slice
through a pineapple, soda can, or even a penny! You might expect to
pay $100 or even $200 for a set of knives like these, but right now you
can get this incredible knife set for only $39.99!
Sound familiar? It should. Most infomercials use this technique to make
whatever they are offering seem like a great deal. By mentioning $100 or
$200 as the price you might expect to pay, the infomercial sets a high
reference point, making the final price of $39.99 seem like a steal.
This is also why retailers often list a “regular” or manufacturer’s standard
retail price even when something is on sale. They want consumers to use
those prices as the reference price, making the sale price look even better.
Consumers are so focused on getting a good deal that, as the barbecue grill
example showed, they sometimes even end up paying more to get it.
Reference points also work with quantities.
But wait, there’s more! If you call now, we’ll throw in a second set of
these knives absolutely free! That’s right, an extra set for the same
price. And we’ll even throw in this handy knife sharpener. No extra
charge!
Here the infomercial is taking the reference quantity and augmenting it.
You expected to pay $39.99 for one set of Miracle Blade knives, but now
you are getting an extra set, and a knife sharpener, for the same price. In
addition to the price being lower than your expectations (which was set by
them in the first place), the additional goods makes the offer seem like an
even better deal.
—————
How far will the effect of putting something on sale go? Marketing
scientists Eric Anderson and Duncan Simester wanted to find out. So a few
years ago they paired up with a company that sends clothing catalogs to
homes across the United States. Think L.L. Bean, Spiegel, or Lands’ End.
Most of the clothes in these catalogs are full price, but sometimes the
catalog features certain sale items and drops its prices. Not surprisingly, this
increases sales. People like to pay less, so dropping the price makes things
more desirable.
But Anderson and Simester had a different question in mind. They
wondered whether consumers find the idea of a discount so powerful that
merely labeling something as “on sale” would increase purchase.
To test this possibility, Anderson and Simester created two different
versions of the catalog and mailed each to more than fifty thousand people.
In one version some of the products (let’s call them dresses) were marked
with signs that said “Pre-Season SALE.” In the other version the dresses
were not marked as on sale.
Sure enough, marking those items as on sale increased demand. By more
than 50 percent.
The kicker?
The prices of the dresses were the same in both versions of the catalog.
So using the word “sale” beside a price increased sales even though the
price itself stayed the same.
—————
Another tenet of prospect theory is something called “diminishing
sensitivity.” Imagine you are looking to buy a new clock radio. At the store
where you expect to buy it, you find that the price is $35. A clerk informs
you that the same item is available at another branch of the same store for
only $25. The store is a twenty-minute drive away and the clerk assures you
that they have what you want there.
What would you do? Would you buy the clock radio at the first store or
drive to the second store?
If you’re like most people, you’re probably willing to go to the other
store. After all, it’s only a short drive away and you save almost 30 percent
on the radio. It seems like a no-brainer.
But consider a similar example. Imagine you are buying a new television.
At the store where you expect to buy it, you find that the price is $650. A
clerk informs you that the same item is available at another branch of the
same store for only $640. The store is a twenty-minute drive away and the
clerk assures you that they have what you want there.
What would you do in this situation? Would you be willing to drive
twenty minutes to save $10 on the television?
If you’re like most people, this time around you probably said no. Why
drive twenty minutes to save a few bucks on a TV? You’d probably spend
more on gas than what you’d save on the product. In fact, when I gave each
scenario to one hundred different people, 87 percent said they’d buy the
television at the first store while only 17 percent said the same for the clock
radio.
But if you think about it, these two scenarios are essentially the same.
They’re both about driving twenty minutes to save $10. So people should
have been equally willing to take the drive in each scenario.
Except they weren’t. While almost everyone is willing to endure the
drive for the cheaper clock radio, almost no one is willing to do it when
buying a TV. Why?
Diminishing sensitivity reflects the idea that the same change has a
smaller impact the farther it is from the reference point. Imagine that you
enter a lottery at your office or your child’s school. You’re not expecting to
get much out of it, but to your surprise you win $10. Lucky you! Winning
anything is great, so you’d probably be pretty happy about it.
Now imagine you won $20 instead. You’d probably feel even happier.
Maybe you wouldn’t be doing backflips in either case, but winning $20
would feel significantly better than winning only $10.
Okay, now let’s take that same lottery and that same $10 increase in
winnings and let’s raise the stakes a little. Imagine you won $120 rather
than $110. Or even better, $1,020 rather than $1,010. Suddenly that extra
$10 wouldn’t matter as much. You’d probably feel essentially the same if
you won $120 rather than $110. If you won $1,020 rather than $1,010 you
probably wouldn’t even notice. The same change—gaining ten more dollars
—has a smaller and smaller impact the farther you move from your
reference point of zero dollars or not winning anything.
Diminishing sensitivity helps explain why people are more willing to
drive to save the money on the clock radio. The clock radio was much
cheaper, so a discount from $35 to $25 seems like a pretty good deal. But
even though the television is also $10 off, it doesn’t seem like a bargain
given how much more expensive the television was in the first place.
HIGHLIGHTING INCREDIBLE VALUE
Deals seem more appealing when they highlight incredible value. As
discussed in the Social Currency chapter, the more remarkable something
is, the more likely it will be discussed. We’re bombarded with deals all the
time. If we shared every time the grocery store knocked ten cents off a can
of soup no one would be friends with us anymore. A deal needs to cut
through the clutter to get shared.
As prospect theory illustrates, one key factor in highlighting incredible
value is what people expect. Promotional offers that seem surprising or
surpass expectations are more likely to be shared. This can be because the
actual deal itself exceeds expectations (for example, the percentage off is so
unbelievable) or because the way the deal is framed makes it seem that way.
Another factor that affects whether deals seem valuable is their
availability. Somewhat counterintuitively, making promotions more
restrictive can actually make them more effective. Just as in the examples of
Please Don’t Tell and Rue La La that we discussed in the Social Currency
chapter, restricting availability through scarcity and exclusivity makes
things seem more valuable.
Take timing or frequency. Putting something on sale can make it seem
like a good deal. But if a product is always on sale people start to adjust
their expectations. Rather than the full, “regular” price being their reference
point, the sale price becomes the expected price. This happens with rug
stores that always offer 70 percent off. People come to realize that “sales”
are the norm and no longer see them as deals. The same is true even with
the word “sale.” While noting something is on sale can increase demand, if
too many items in a store are listed as being on sale, it can actually reduce
purchase.
But offers that are available for only a limited time seem more appealing
because of the restriction. Just like making a product scarce, the fact that a
deal won’t be around forever makes people feel that it must be a really good
one.
Quantity limits work the same way. Retailers sometimes create limits
around the number of a given discounted item a given customer can buy.
“One per household” or “Limit three per customer.” You might think that by
making it harder for people to get as many as they want these restrictions
would hurt demand. But they actually have the opposite effect by making
the promotion seem like an even better deal. “Wow, if I can only get one of
these, it must mean that the deal is so good that the store is worried about
running out of them. Better get one fast!” Indeed, research finds that
quantity purchase limits increase sales by more than 50 percent.
Even restricting who has access can make a promotional offer seem
better. Some deals are available to everyone. Anyone can walk up to the
discount rack at the Gap and get money off chinos, just as any patron can
take advantage of happy hour at his or her local pub. But other deals are
customized, or restricted to a certain set of customers. Hotels reward loyal
members with “exclusive” hotel rates and restaurants have “soft openings”
for a certain clientele.
These offers seem special. This boosts sharing not only by increasing
Social Currency, but also by making the deal itself seem better. Like
restrictions on quantity or timing, the mere fact that not everyone can get
access to this promotion makes it seem more valuable. This increases
Practical Value, which in turn, boosts sharing.
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