How to Sell a Cheaper Product

July 15, 2010

Here is the simple answer – Remind consumers of the opportunity cost.

Here is a fuller answer. Economic theory assumes people are rational and will evaluate costs and benefits properly when making decisions. But reality is a bit messier than that, leading to all sorts of situations where people don’t necessarily make the right decision. One specific type of situation is when consumers are contemplating a purchase decision.

Economic theory assumes that people will spontaneously consider how else they could have used the money they were thinking of spending on the product (in technical terms, maximizing their utility by rationally evaluating the alternatives and purchasing this product). Not really, say Yale professors Shane Fredrick , Nathan Novemsky and Ravi Dhar.  “To expect consumers to automatically consider other uses of their money every time they consider a purchase, although rational, is clearly unrealistic” says Professor Novemsky. Their research shows that people in fact don’t always consider opportunity costs and hence their purchase decisions are significantly affected. How so? Let’s take a look at their approach to clarifying this issue. 

In a series of experiments, separate groups of respondents were provided with consumer product choices (such as buying a DVD, an iPod etc). The only difference is that the control group is given a straightforward Buy/ No Buy option (or buy cheaper/better more expensive option) while the test group is given some variation of what the person can do with the money (Keep it for other purchases, buy songs to go with your new iPod, etc). In every case the group that is reminded of the opportunity cost (i.e. reminded of some other use for the money) is much less likely to show interest in the target product. For example, while 75% indicate a willingness to buy a favorite DVD that has gone on sale at a special price of $14.99, that proportion drops to 55% when the second group is simply reminded that they can keep the money for other purchases.

How does this relate to a company attempting to sell a cheaper product in the market? Take the example of IKEA, which might feel that its furniture, while cheaper, is still of good quality and therefore presents superior value to customers. To prevent people from assuming that cheaper implies lower quality, and therefore not buying their product, IKEA could remind people of what they could do with the money saved by buying their product. In fact, this is exactly what they did as seen in this advertisement from Singapore where an explicit pitch is made for the number of shoes that can be bought with the money saved by buying an IKEA cabinet to store shoes.