Monday, September 14, 2009
1. Encourage false comparisons
When Williams-Sonoma introduced bread machines, sales were slow. When they added a "deluxe" version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain
When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7. When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7. The amount saved and time involved are the same, but people make very different choices. Watch out for relative thinking; it comes naturally to all of us.
- Realize that some premium options exist as decoys -- that is, they are there only to make the less expensive options look more appealing, because they're easy to compare. Don't make binding decisions solely based on how easy it is to compare two side-by-side options from the same vendor. Try comparing all the alternatives, even those from other vendors.
- Don't be swayed by relative percentages for small dollar amounts. Yes, you saved 25%, but how much effort and time did you expend on that seven bucks?
If i'm in the supermarket deciding on organic or non-organic bananas for 25 cents less, my instinct is to save money and buy non-organic, even though the difference is tiny compared to my total food budget.
Economists must go a bit crazy--either crazy crazy in the case of academics, or joyous crazy in the case of entrepreneurs--over this kind of thing.
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