Now consider you arrive at the theatre and discover you have lost the $15 you had to purchase a ticket. Would you spend the money on a movie ticket of the same price?
Richard Thaler, an Economist at the University of Chicago, found that only 46% of people would buy another movie ticket after losing the pre-paid one. More interestingly, 88% would still buy a movie ticket after losing the money. Why?
Mental accounting describes the tendency for individuals to create mental categories and use these groupings to make decisions – even if the categories are entirely arbitrary. It’s something that can cause problems for us if we aren’t careful. In the case of the movie theatre ticket, we only allocated $15 for a movie, roughly equivalent to the value of the experience, but now the movie costs $30. But since losing the $15 was not in the category of spend for the movie, we feel less conflicted about spending $15 again for a new ticket.
Since we know people get caught in the trap of mental accounting, how can we overcome this potential limitation?
Be the First in Their Mind
Be the go-to brand customers think of when they need a particular good or service. Leveraging mental accounting, customers might feel they used up their budget on your products. That will limit their engagement with a different brand that sells the same kind of product.
Position Your Product in a New Mental Category
Instead of shampoo (necessity), this is an at-home spa and relaxation treatment for your hair (self-care and well-being). When thinking about differentiation, work backwards how your customers would categorize your product and then break through the boundaries. This might actually shift their perceptions of spending.
There are certain purchases that line up with budgets. Align your product early in that particular budget’s cycle. One example is the back-to- school kids’ clothing push. Being a leader there means that the back-to-school clothes budget gets spent on your product rather than one a competitor’s. Try to learn more about your customers’ buying timelines and align your products with their decision timing.
The process of bundling makes it harder to categorize the singular purchase into a neat and tidy category. If there is a product or service you’d like to push, cross-market it with something different. Pro tip: positioning one as FREE is highly motivating. The word FREE motivates people more than reducing the price an additional item in the bundle by 95%.
Whether you market to leverage mental accounting or to break down this habit, recognizing that it plays a part in the minds of your customers gives you a huge advantage.