Contagious: Why Things Catch On (20 page)

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One of the main tenets of prospect theory is that people don’t evaluate things in absolute terms. They evaluate them relative to a comparison standard, or “reference point.” Fifty cents for coffee isn’t just fifty cents for coffee. Whether that seems like a fair price or not depends on your expectations. If you live in New York City, paying fifty cents for a cup of coffee seems pretty cheap. You’d chuckle at your good luck and buy coffee from that place every day. You might even tell your friends.

If you live in rural India, though, fifty cents might seem hugely expensive. It would be way more than you would dream of paying for coffee and you’d never buy it. If you told your friends anything it would be your outrage at the price gouging.

You see the same phenomenon at work if you go to the movies or the store with people in their seventies or eighties. They often complain about the prices. “What?” they exclaim. “No way am I paying eleven dollars for a movie ticket. That’s such a rip-off!”

It might seem that old people are stingier than the rest of us. But there is a more fundamental reason that they think the prices are unfair. They have different reference points. They remember the days when a movie ticket was forty cents and steak was ninety-five cents a pound, when toothpaste was twenty-nine cents and paper towels cost a dime. Because of that, it’s hard for them to see today’s prices as fair. The prices seem so much higher than what they remember, so they balk at paying them.

Reference points help explain the barbecue grill scenarios we discussed a few pages ago. People use the price they expect to pay for something as their reference point. So the grill seemed like a better deal when it was marked down from $350 to $250 rather than when it was discounted from $255 to $240, even though it was the same grill. Setting a higher reference point made the first deal seem better even though the price was higher overall.

Infomercials often use the same approach.

The amazing Miracle Blade knives last forever! Watch them slice through a pineapple, soda can, or even a penny! You might expect to pay $100 or even $200 for a set of knives like these, but right now you can get this incredible knife set for only $39.99!

Sound familiar? It should. Most infomercials use this technique to make whatever they are offering seem like a great deal. By mentioning $100 or $200 as the price you might expect to pay, the infomercial sets a high reference point, making the final price of $39.99 seem like a steal.

This is also why retailers often list a “regular” or manufacturer’s standard retail price even when something is on sale. They want consumers to use those prices as the reference price, making the sale price look even better. Consumers are so focused on getting a good deal that, as the barbecue grill example showed, they sometimes even end up paying more to get it.

Reference points also work with quantities.

But wait, there’s more! If you call now, we’ll throw in a second set of these knives absolutely free! That’s right, an extra set for the same price. And we’ll even throw in this handy knife sharpener. No extra charge!

Here the infomercial is taking the reference quantity and augmenting it. You expected to pay $39.99 for one set of Miracle Blade knives, but now you are getting an extra set, and a knife sharpener, for the same price. In addition to the price being lower than your expectations (which was set by them in the first place), the additional goods makes the offer seem like an even better deal.

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How far will the effect of putting something on sale go? Marketing scientists Eric Anderson and Duncan Simester wanted to find out. So a few years ago they paired up with a company that sends clothing catalogs to homes across the United States. Think L.L. Bean, Spiegel, or Lands’ End. Most of the clothes in these catalogs are full price, but sometimes the catalog features certain sale items and drops its prices. Not surprisingly, this increases sales. People like to pay less, so dropping the price makes things more desirable.

But Anderson and Simester had a different question in mind.
They wondered whether consumers find the idea of a discount so powerful that merely labeling something as “on sale” would increase purchase.

To test this possibility, Anderson and Simester created two different versions of the catalog and mailed each to more than fifty thousand people. In one version some of the products (let’s call them dresses) were marked with signs that said “Pre-Season SALE.” In the other version the dresses were not marked as on sale.

Sure enough, marking those items as on sale increased demand. By more than 50 percent.

The kicker?

The prices of the dresses were the same in both versions of the catalog. So using the word “sale” beside a price increased sales
even though the price itself stayed the same.

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Another tenet of prospect theory is something called “diminishing sensitivity.” Imagine you are looking to
buy a new clock radio. At the store where you expect to buy it, you find that the price is $35. A clerk informs you that the same item is available at another branch of the same store for only $25. The store is a twenty-minute drive away and the clerk assures you that they have what you want there.

What would you do? Would you buy the clock radio at the first store or drive to the second store?

If you’re like most people, you’re probably willing to go to the other store. After all, it’s only a short drive away and you save almost 30 percent on the radio. It seems like a no-brainer.

But consider a similar example. Imagine you are buying a new television. At the store where you expect to buy it, you find
that the price is $650. A clerk informs you that the same item is available at another branch of the same store for only $640. The store is a twenty-minute drive away and the clerk assures you that they have what you want there.

What would you do in
this
situation? Would you be willing to drive twenty minutes to save $10 on the television?

If you’re like most people, this time around you probably said no. Why drive twenty minutes to save a few bucks on a TV? You’d probably spend more on gas than what you’d save on the product. In fact, when I gave each scenario to one hundred different people, 87 percent said they’d buy the television at the first store while only 17 percent said the same for the clock radio.

But if you think about it, these two scenarios are essentially the same. They’re both about driving twenty minutes to save $10. So people should have been equally willing to take the drive in each scenario.

Except they weren’t. While almost everyone is willing to endure the drive for the cheaper clock radio, almost no one is willing to do it when buying a TV. Why?

Diminishing sensitivity reflects the idea that the same change has a smaller impact the farther it is from the reference point. Imagine that you enter a lottery at your office or your child’s school. You’re not expecting to get much out of it, but to your surprise you win $10. Lucky you! Winning anything is great, so you’d probably be pretty happy about it.

Now imagine you won $20 instead. You’d probably feel even happier. Maybe you wouldn’t be doing backflips in either case, but winning $20 would feel significantly better than winning only $10.

Okay, now let’s take that same lottery and that same $10 increase in winnings and let’s raise the stakes a little. Imagine you
won $120 rather than $110. Or even better, $1,020 rather than $1,010. Suddenly that extra $10 wouldn’t matter as much. You’d probably feel essentially the same if you won $120 rather than $110. If you won $1,020 rather than $1,010 you probably wouldn’t even notice. The same change—gaining ten more dollars—has a smaller and smaller impact the farther you move from your reference point of zero dollars or not winning anything.

Diminishing sensitivity helps explain why people are more willing to drive to save the money on the clock radio. The clock radio was much cheaper, so a discount from $35 to $25 seems like a pretty good deal. But even though the television is also $10 off, it doesn’t seem like a bargain given how much more expensive the television was in the first place.

HIGHLIGHTING INCREDIBLE VALUE

Deals seem more appealing when they highlight incredible value. As discussed in the Social Currency chapter, the more remarkable something is, the more likely it will be discussed. We’re bombarded with deals all the time. If we shared every time the grocery store knocked ten cents off a can of soup no one would be friends with us anymore. A deal needs to cut through the clutter to get shared.

As prospect theory illustrates, one key factor in highlighting incredible value is what people expect. Promotional offers that seem surprising or surpass expectations are more likely to be shared. This can be because the actual deal itself exceeds expectations (for example, the percentage off is so unbelievable) or because the way the deal is framed makes it seem that way.

Another factor that affects whether deals seem valuable is their availability. Somewhat counterintuitively, making promotions
more restrictive can actually make them more effective. Just as in the examples of Please Don’t Tell and Rue La La that we discussed in the Social Currency chapter, restricting availability through scarcity and exclusivity makes things seem more valuable.

Take timing or frequency. Putting something on sale can make it seem like a good deal. But if a product is always on sale people start to adjust their expectations. Rather than the full, “regular” price being their reference point, the sale price becomes the expected price. This happens with rug stores that always offer 70 percent off. People come to realize that “sales” are the norm and no longer see them as deals. The same is true even with the word “sale.”
While noting something is on sale can increase demand, if too many items in a store are listed as being on sale, it can actually reduce purchase.

But offers that are available for only a limited time seem more appealing because of the restriction. Just like making a product scarce, the fact that a deal won’t be around forever makes people feel that it must be a really good one.

Quantity limits work the same way. Retailers sometimes create limits around the number of a given discounted item a given customer can buy. “One per household” or “Limit three per customer.” You might think that by making it harder for people to get as many as they want these restrictions would hurt demand. But they actually have the opposite effect by making the promotion seem like an even better deal. “Wow, if I can only get one of these, it must mean that the deal is so good that the store is worried about running out of them. Better get one fast!” Indeed, research finds that
quantity purchase limits increase sales by more than 50 percent.

Even restricting who has access can make a promotional offer seem better. Some deals are available to everyone. Anyone
can walk up to the discount rack at the Gap and get money off chinos, just as any patron can take advantage of happy hour at his or her local pub. But other deals are customized, or restricted to a certain set of customers. Hotels reward loyal members with “exclusive” hotel rates and restaurants have “soft openings” for a certain clientele.

These offers seem special. This boosts sharing not only by increasing Social Currency, but also by making the deal itself seem better. Like restrictions on quantity or timing, the mere fact that not everyone can get access to this promotion makes it seem more valuable.
This increases Practical Value, which in turn, boosts sharing.

The Rule of 100

Another framing factor that impacts practical value is how promotional offers are expressed. Some offers are expressed in dollars off, or absolute discounts ($5 or $50 off). Other offers are expressed in percentage off, or relative discounts (5 percent or 50 percent off). Could whether a promotion is framed as money or as a percentage off affect how big the discount seems?

Take twenty percent off a $25 shirt. The same reduction can be represented as 20 percent off or $5 off. Which seems like a better deal?

Or think about a $2,000 laptop. The same reduction on a $2,000 laptop can be represented as 10 percent off or $200 off. Does one method of framing the discount make the deal seem better than the other?

Researchers find that
whether a discount seems larger as money or percentage off depends on the original price. For low-priced products, like books or groceries, price reductions seem more significant when they are framed in percentage terms.
Twenty percent off that $25 shirt seems like a better deal than $5 off. For high-priced products, however, the opposite is true. For things like laptops or other big-ticket items, framing price reductions in dollar terms (rather than percentage terms) makes them seem like a better offer. The laptop seems like a better deal when it is $200 off rather than 10 percent off.

A simple way to figure out which discount frame seems larger is by using something called the Rule of 100.

If the product’s price is less than $100, the Rule of 100 says that percentage discounts will seem larger. For a $30 T-shirt or a $15 entrée, even a $3 discount is still a relatively small number. But percentagewise (10 percent or 20 percent), that same discount looks much bigger.

If the product’s price is more than $100, the opposite is true. Numerical discounts will seem larger. Take a $750 vacation package or the $2,000 laptop. While a 10 percent discount may seem like a relatively small number, it immediately seems much bigger when translated into dollars ($75 or $200).

So when deciding how good a promotional offer really is, or how to frame a promotional offer to make it better, use the Rule of 100. Think about where the price falls relative to $100 and how that shifts whether absolute or relative discounts seem more attractive.

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One last point about promotional offers is that the practical value is more effective the easier it is for people to see. Take the shopper discount cards that you get at your local grocery store or pharmacy. These cards are certainly useful. They save consumers money and sometimes even give them free gifts if they have accumulated enough purchases. But one problem is that the practical
value is not very visible. The only information people get about how much they saved is hidden among a half dozen other pieces of information on a lengthy receipt. And given that most people don’t show their receipts to others, it’s unlikely that anyone but the person who used the card will see how much they saved. That makes it less likely that the information will be contagious.