Remember your Economics: Reminding Consumers of Opportunity Costs

The last time you bought a pound of ground beef, you sacrificed more than just a few dollars out of your wallet. You also surrendered your ability to use those few dollars towards any other purchases, from a cup of coffee, to a newspaper, to a tiny fraction of a new BMW. Economists call these sacrifices “opportunity costs”. Economics 101 teaches that consumers weigh opportunity costs when they choose to buy things – that is to say, that you consciously or subconsciously decided that your few dollars were better spent at the grocery store than the car dealership.

November 6, 2013

In reality, opportunity costs are often entirely neglected. It turns out, most consumers don’t think too much about newspapers or fractions of sports cars when they take out their wallets. However, an article by Professors Shane Frederick, Nathan Novemsky and Ravi Dhar at Yale School of Management, as well as co-authors from Singapore Management University and Arizona State University explains that gentle reminders can effectively encourage consumers to remember their economics and better consider opportunity costs when they make purchases. In “Opportunity Cost Neglect”, which was published in the Journal of Consumer Research, the authors demonstrate just how easy it can be to change consumer behavior by reminding them of opportunity costs.

These reminders do not need to be complex economics lessons. One study in the paper asked consumers if they would be interested in buying a movie on DVD. Half of the participants were given the choice of buying the movie or not. The other half chose between buying the movie and saving their money for other purchases. Just reminding second half of what they already knew – that skipping the purchase would free up money for other things – dropped their willingness to purchase from 75% to 55%.

The effect is even more dramatic when consumers compare more expensive and more affordable purchasing options. A second study gave two groups a choice between buying a premium model or a discount model MP3 player. Both groups were given the same information on the price and specifications of the two models, but one group was explicitly reminded of how much more money they would have in their pocket if they chose the discount model. Just adding that simple reminder made the cheaper option dramatically more popular – it was chosen by 73% of the group, versus only 37% of the control group. The paper doesn’t just rely on surveys or hypotheticals – the authors found similar effects in trials using real money and real purchasing decisions, too.

While opportunity cost reminders can clearly influence behavior, they do not work equally well on all people. The researchers found that consumers who tend to be stingier with their budgets were less likely to be swayed by reminders. One possible explanation is that thriftier shoppers are more inclined to consider opportunity costs instinctively, and therefore didn’t need to be reminded of them.

This research has profound marketing implications for all but the most high-end and expensive products and services. It is a reminder that while consumers do not instinctively consider the opportunity costs of expensive purchases, a simple and gentle reminder can make affordable items far more attractive. The paper also suggests that innovative bundling of goods could be a way of forcing consumers to consider the opportunity costs of premium purchases. Consider an affordable car that costs $5,000 less than a luxury car. Selling the affordable car at the same price but including $5,000 worth of free gasoline would make the opportunity cost of the luxury car easily apparent.

“Opportunity Cost Neglect” doesn’t just have lessons for marketers – it is also a reminder for all consumers: next time you’re at the grocery store, remember your Economics 101 and don’t ignore your opportunity costs.

Contributed by:

Robert Kimball
Joint MBA & MEM Candidate, Class of 2016
Yale School of Management
Yale School of Forestry & Environmental Studies