MIT Sloan professor finds simple but potent tool to market lower-cost items; Key is to show specific ways consumer can use savings, says Shane Frederick

CAMBRIDGE, Mass., Jun 25, 2007 — Frozen in indecision between a $1000 stereo system and another that was slightly less good but also $300 less, MIT Sloan School of Management Shane Frederick agonized for nearly an hour, until the salesman — mercifully and, perhaps, strategically — intervened, suggesting that if he purchased the cheaper stereo, he could use the $300 for 30 new CDs to go along with his new system.

With a mixture of shame and fascination, Frederick, who teaches consumer behavior at MIT Sloan and has a PhD in decision theory, recalls how easily his own preferences were manipulated: “I was just stunned at the huge effect that had on my preference,” said Frederick. “This is exactly the area I study, and I could not believe how powerful this tactic was.”

His personal experience buying a stereo led him into research that has important implications for marketing, from low-end retail items to automobiles. His basic finding: despite conventional wisdom that lower prices alone will sway shoppers toward the cheaper of two similar items, such “implicit” cost savings are not nearly as effective as explicit reminders of how much is being saved — and how that money might be used.

In their subsequent research, Frederick and his co-authors found that without such explicit prompts, consumers don't necessarily consider “opportunity costs” — the things they sacrifice when making a decision. “Our research challenges the widespread presumption that ... consumers spontaneously consider opportunity costs,” the study said. “We found that even minimal prompts to consider opportunity costs both reduced the likelihood of purchasing a [single] product and increased the choice share of the cheaper option [when deciding between two].”

In this time of high gasoline prices, for example, car companies often cite good gas mileage in their ads. But Frederick says a more effective sales tactic might be to emphasize the economy of purchasing a smaller vehicle in terms of how much money is actually saved — and how that money might be alternatively used. An ad might note how the savings could go to a new wardrobe of clothes, “perhaps illustrated by a smartly dressed driver ferrying her unstylish friends in her new Volkswagen.”

Some companies already use this technique. Frederick's study cites an advertisement for IKEA furniture in a Singapore newspaper that depicted, in one panel, an unhappy woman standing next to a cabinet containing a single pair of shoes. “The caption beneath the picture reads, ‘Customized cabinet ($1670) + 1 pair of shoes ($30) = 1700.’ By contrast, the right panel depicted a woman beaming at her daughter in front of a more modest IKEA cabinet that was overflowing with shoes. The caption beneath showed the price of the cabinet ($245) plus the price of 48 pairs of shoes ($1440) = $1685.”

In their studies, Frederick and co-authors find that even the tiniest of nudges, such as describing the price difference as residual cash can get consumers to start thinking in terms of opportunity cost. “It isn't necessary to hit consumers over the head and list all the things one can buy from the savings on a lower cost item,” he said. “Even minimal intervention, such as specifying the residual cash can affect decisions, can work.”

Indeed, the researchers even found that offering examples of unattractive uses for leftover cash (e.g., a weekend in Des Moines, Iowa) deterred expenditure, presumably by functioning as a reminder of other uses. In another study, the authors speculate that bundling a product with a $9 “free” box of chocolates may be a more effective promotional tool than offering $9 off, even if the consumer would never pay $9 for those chocolates. Though “our examples and our data seem pretty compelling,” said Frederick, this kind of promotional tactic remains “surprisingly rare.”

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