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30-01-2011, 09:53 PM
Jan 30, 2011
small change
Find it hard to save money?
To avoid falling into spending traps, understand the hidden forces and marketing strategies that shape your decision to buy an item
By Lorna Tan, Senior Correspondent
When clothing store Desigual offered free clothes to the first 100 patrons who turned up in their underwear at its Madrid store earlier this month, people arrived in droves despite the cold weather. -- PHOTO: REUTERS ST FILE PHOTO
'I cannot save' is a common refrain among people who claim that they have no money. The saver in me finds it hard to understand why, unless you are living at subsistence level.
Recently, I came across a book Predictably Irrational written by Dr Dan Ariely, a professor of psychology and behavioural economics at Duke University, United States, which explains why people act against their best intentions. The author carried out several experiments in a bid to uncover the hidden forces that shape our decision-making process.
In my experience, people who claim that they have difficulty putting aside some money for a rainy day tend to have certain buying tendencies.
I have singled out a few common marketing strategies from Dr Ariely's book that we can look out for to avoid falling into the trap of buying something we do not need but think we do.
Relative pricing
The book explains that when people make decisions, it is rarely in absolute terms. This is because we do not have an internal system that prices things. Instead, we estimate the value of an item from analysing its price with another. For example, we may not know how much a three-room condominium unit costs but we cannot be wrong if we believe that it is more expensive than a two-room condo in the same area.
Let us consider the following advertisement which was illustrated in the book. Which offer sounds the most appealing to you?
1) Annual subscription for online access to a magazine: $59
2) Annual subscription for the print edition of the magazine: $125
3) Annual subscription for print and Web subscription: $125
For most people, the third option looks like a no-brainer. When compared with the annual subscription for online access and that for the printed version, paying for a year's subscription that gives you access to both is definitely superior. A logical person would not go for the second option as it costs the same as the third one that offers more.
But hang on a second. Before you get carried away with the excitement of what seems like a great deal, aren't you being manipulated to gravitate towards the third option, particularly if you were keen on subscribing to just the online version in the first place? Dr Ariely calls the second option the decoy.
By carrying out a study where people were offered just option one and three instead of all three alternatives, he found that most people would not even consider option three.
What is the lesson here? Highly priced options may not find customers but they help to boost sales. By creating an expensive choice (decoy), customers are attracted to opt for the second most expensive option which can be engineered to achieve a fat profit margin for the product provider.
It's free
Ask yourself this: How often have we bought something just because it comes with another item that is free? In his book, Dr Ariely observes that most of us find the word 'free' irresistible. In fact, it makes us believe we are better off for possessing the 'free' item.
'Things that we would never consider purchasing become incredibly appealing as soon as they are FREE,' he writes.
In an experiment, Dr Ariely underlined the irresistibility of free offers. He set up a table at a public area and offered two chocolates, Lindt truffles and Hershey's Kisses. Each customer could pick only one. He priced the very popular Lindt truffles at 15 cents and a Kiss at one cent. Not surprisingly, about 73 per cent of the people who flocked to the table chose the truffle while the rest opted for a Kiss. They had compared the price and quality of the truffle with those of Kiss and it was rational that most chose the former.
When the prices were lowered to 14 cents for the truffle and Kisses became free, the reverse happened. About 69 per cent chose the free Kiss and gave up the chance to buy the Lindt truffle for a lower price.
Dr Ariely believes the rationale for the behaviour is that we know most transactions have an upside and a downside. But when something is free, we forget the downside. We do not like making a loss, so a free item does not come with a loss situation.
What is the lesson here? When we buy something that comes with another that is free, we may end up making decisions that are not in our best interest. This is because we tend to overreact to the free one.
Anchoring
Most of us are familiar with the temptation to 'enhance' the quality of our lives. It can be something as innocent as enjoying a more expensive cup of coffee to buying a brand-name piece of clothing, a new set of cutlery, changing the furniture or upgrading to a bigger home and a more expensive car.
Before you know it, you find it hard to move back to the previous state, something that Dr Ariely terms the pre-ownership state. Moving backwards is deemed a loss, 'one that we cannot abide', he explains.
What we also need to note is that once we are 'anchored' to the more expensive cup of coffee or a higher standard of living, it affects our future preferences and decisions as well. So in the case of coffee drinking, you will find that it has become a habit to pay more for coffee.
What is the lesson here? Understand that our first decisions can translate into long-term habits. By firstly being aware of this, Dr Ariely suggests that we can train to question ourselves on our repeated behaviours or decisions. Ask how we began having that habit or buying that item and how much pleasure are we really getting out of it? Could we spend the money on something else?
His suggestions and discoveries on human behaviour make a lot of sense to me. Call me a scrooge, but I have resisted the temptation of spending proportionately more as my modest pay inched up during my 22-year working life. So, as my income goes up and my spending is only slightly higher due to a conscious preference to stick to a modest lifestyle, my savings component has gone up over the years. With more savings, I am able to better manage and grow my wealth.
So before you reach out to buy that first Blu-ray disc player or Prada bag, think again.
lorna@sph.com.sg
--------------------------------------------------------------------------------
1 Watch out for decoys
Highly priced options may not find customers but they help to boost sales. By creating an expensive choice (decoy), customers are attracted to opt for the second most expensive option which can be engineered to achieve a fat profit margin for the product provider.
2 'Free' makes you irrational
We know most transactions have an upside and a downside. But when something is free, we forget the downside... we may end up making decisions that are not in our best interest. This is because we tend to overreact to the free item.
3 Before you upgrade...
Our first decisions can translate into long-term habits. Once we are 'anchored' to a more expensive item, say a brand of designer coffee, it becomes harder to return to the cheaper option, so the first decision affects our future preferences and decisions as well.
small change
Find it hard to save money?
To avoid falling into spending traps, understand the hidden forces and marketing strategies that shape your decision to buy an item
By Lorna Tan, Senior Correspondent
When clothing store Desigual offered free clothes to the first 100 patrons who turned up in their underwear at its Madrid store earlier this month, people arrived in droves despite the cold weather. -- PHOTO: REUTERS ST FILE PHOTO
'I cannot save' is a common refrain among people who claim that they have no money. The saver in me finds it hard to understand why, unless you are living at subsistence level.
Recently, I came across a book Predictably Irrational written by Dr Dan Ariely, a professor of psychology and behavioural economics at Duke University, United States, which explains why people act against their best intentions. The author carried out several experiments in a bid to uncover the hidden forces that shape our decision-making process.
In my experience, people who claim that they have difficulty putting aside some money for a rainy day tend to have certain buying tendencies.
I have singled out a few common marketing strategies from Dr Ariely's book that we can look out for to avoid falling into the trap of buying something we do not need but think we do.
Relative pricing
The book explains that when people make decisions, it is rarely in absolute terms. This is because we do not have an internal system that prices things. Instead, we estimate the value of an item from analysing its price with another. For example, we may not know how much a three-room condominium unit costs but we cannot be wrong if we believe that it is more expensive than a two-room condo in the same area.
Let us consider the following advertisement which was illustrated in the book. Which offer sounds the most appealing to you?
1) Annual subscription for online access to a magazine: $59
2) Annual subscription for the print edition of the magazine: $125
3) Annual subscription for print and Web subscription: $125
For most people, the third option looks like a no-brainer. When compared with the annual subscription for online access and that for the printed version, paying for a year's subscription that gives you access to both is definitely superior. A logical person would not go for the second option as it costs the same as the third one that offers more.
But hang on a second. Before you get carried away with the excitement of what seems like a great deal, aren't you being manipulated to gravitate towards the third option, particularly if you were keen on subscribing to just the online version in the first place? Dr Ariely calls the second option the decoy.
By carrying out a study where people were offered just option one and three instead of all three alternatives, he found that most people would not even consider option three.
What is the lesson here? Highly priced options may not find customers but they help to boost sales. By creating an expensive choice (decoy), customers are attracted to opt for the second most expensive option which can be engineered to achieve a fat profit margin for the product provider.
It's free
Ask yourself this: How often have we bought something just because it comes with another item that is free? In his book, Dr Ariely observes that most of us find the word 'free' irresistible. In fact, it makes us believe we are better off for possessing the 'free' item.
'Things that we would never consider purchasing become incredibly appealing as soon as they are FREE,' he writes.
In an experiment, Dr Ariely underlined the irresistibility of free offers. He set up a table at a public area and offered two chocolates, Lindt truffles and Hershey's Kisses. Each customer could pick only one. He priced the very popular Lindt truffles at 15 cents and a Kiss at one cent. Not surprisingly, about 73 per cent of the people who flocked to the table chose the truffle while the rest opted for a Kiss. They had compared the price and quality of the truffle with those of Kiss and it was rational that most chose the former.
When the prices were lowered to 14 cents for the truffle and Kisses became free, the reverse happened. About 69 per cent chose the free Kiss and gave up the chance to buy the Lindt truffle for a lower price.
Dr Ariely believes the rationale for the behaviour is that we know most transactions have an upside and a downside. But when something is free, we forget the downside. We do not like making a loss, so a free item does not come with a loss situation.
What is the lesson here? When we buy something that comes with another that is free, we may end up making decisions that are not in our best interest. This is because we tend to overreact to the free one.
Anchoring
Most of us are familiar with the temptation to 'enhance' the quality of our lives. It can be something as innocent as enjoying a more expensive cup of coffee to buying a brand-name piece of clothing, a new set of cutlery, changing the furniture or upgrading to a bigger home and a more expensive car.
Before you know it, you find it hard to move back to the previous state, something that Dr Ariely terms the pre-ownership state. Moving backwards is deemed a loss, 'one that we cannot abide', he explains.
What we also need to note is that once we are 'anchored' to the more expensive cup of coffee or a higher standard of living, it affects our future preferences and decisions as well. So in the case of coffee drinking, you will find that it has become a habit to pay more for coffee.
What is the lesson here? Understand that our first decisions can translate into long-term habits. By firstly being aware of this, Dr Ariely suggests that we can train to question ourselves on our repeated behaviours or decisions. Ask how we began having that habit or buying that item and how much pleasure are we really getting out of it? Could we spend the money on something else?
His suggestions and discoveries on human behaviour make a lot of sense to me. Call me a scrooge, but I have resisted the temptation of spending proportionately more as my modest pay inched up during my 22-year working life. So, as my income goes up and my spending is only slightly higher due to a conscious preference to stick to a modest lifestyle, my savings component has gone up over the years. With more savings, I am able to better manage and grow my wealth.
So before you reach out to buy that first Blu-ray disc player or Prada bag, think again.
lorna@sph.com.sg
--------------------------------------------------------------------------------
1 Watch out for decoys
Highly priced options may not find customers but they help to boost sales. By creating an expensive choice (decoy), customers are attracted to opt for the second most expensive option which can be engineered to achieve a fat profit margin for the product provider.
2 'Free' makes you irrational
We know most transactions have an upside and a downside. But when something is free, we forget the downside... we may end up making decisions that are not in our best interest. This is because we tend to overreact to the free item.
3 Before you upgrade...
Our first decisions can translate into long-term habits. Once we are 'anchored' to a more expensive item, say a brand of designer coffee, it becomes harder to return to the cheaper option, so the first decision affects our future preferences and decisions as well.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/