Opportunity cost: Why buy a Mercedes … when you can get all this?
You're in the local big-box electronics store, standing before a wall of flat-screen TVs. Dazed by the glowing scenes of A Charlie Brown Christmas and those fake-fireplace flames, your eyes dart between an $800 40-incher and a $1,000 46-incher until a store clerk saunters over and plants the seed of possibility.
"If you go with the $800 one," he tells you, "think of all the DVDs you could buy with the $200 you'll have left."
You rush to the cash and snap up the 40-inch TV. Voilà ! You're the unwitting participant in a cunning salesman's trick: highlighting opportunity cost to close a deal.
It's a tool retailers use to land a sale rather than see a customer turn on her heel without buying anything. And it's one store clerks might be trying a little more frequently this season as shoppers try to stretch their dollars, experts say.
Most shoppers don't consider the other ways they could spend money without a few well-placed cues, a new study from the Yale School of Management has found.
If a customer shows interest in two items, a salesperson can likely land a sale on the cheaper model by making her think about all the other Christmas gifts she'll be able to buy with the savings, says lead study author Shane Frederick, an associate professor of marketing at the Yale School of Management.
"I don't know that people very often think spontaneously, 'Here are the other five things I can buy for this price.'"
In a battery of experiments, Prof. Frederick and his colleagues had participants - students and people recruited via the Internet - respond to different purchasing scenarios and measured how and when they'd consider opportunity cost. Some of the experiments found explicit mentions of price difference made the cheaper option more appealing. Researchers also tested the purchasing "pain" of participants by using a "spendthrift-tightwad" scale and found tightwads were less influenced by cues.
"Different manipulations that would cue thoughts of outside expenditures would do one of two things," says Prof. Frederick, who was inspired to research this after being dealt the tactic by a Vancouver salesclerk. "It would make people buy the cheaper option, or it would deter people from some focal purchase, where the cheaper option is to buy nothing and save your money."
It's not just store clerks talking up cheaper items to make a sale. A recent IKEA ad shows two women standing in front of their new armoires - one expensive, the other cheap (and from IKEA). The pricey one holds just one pair of shoes, and the owner sports a scowl. The IKEA cabinet owner beams next to her cupboard overflowing with footwear.
Politicians and activists also raise the spectre of opportunity cost - think U.S. President Dwight Eisenhower's iconic costs-of-war speech from 1953, referenced by President Barack Obama last week as he tried to rally support for sending more troops to Afghanistan.
While the strategy works better for stores hawking lower-priced items, luxury jewellery retailer De Beers spun the idea on its head when it told consumers to put off pricey kitchen renovations in favour of a $20,000 (U.S.) pair of diamond earrings.
"It's not really that the kitchen renovation has been delayed by a year; the money is now gone and in the form of diamond earrings," says Prof. Frederick, who calls it a "genius" marketing move.
While his study didn't look at the recession's impact on opportunity cost, Prof. Frederick says shoppers are probably weighing their options more carefully now than two years ago.
"They're just more cautious generally, so every expenditure is more scrutinized," he says.
Laurence Ashworth, an associate professor of marketing at Queen's University business school, is more convinced of the recession's effects.
"The shoppers out there these days, with greater fear about the economic environment, are showing more signs of opportunity-cost consideration," he says. "One of the consequences of that is it's likely to push people toward cheaper alternatives within a certain product category."
Prof. Frederick suggests that shoppers should think of five other ways to spend their money when faced with a major purchase. "If you can still live without those other five things, then go out and purchase it."
Laura Stricker, a 23-year-old marketing student at George Brown College in Toronto, says she's always second-guessing her purchases. She doesn't need a slick salesclerk or an ad to sway her either way.
"I find it's more natural for me to always be looking out for better deals," she says. "But I think that for a lot of people I know, they tend to buy the first thing they see that they like. They're a lot more impulsive."