Mental accounting happens when customers place money in mental budgets based on subjective criteria. How can you use it in your sales strategy? Read to find out.
This post will show you how to use Mental Accounting phenomenon to increase your sales.
You will also learn:
- what are Mental Budget Boundries.
- actionable tips on how to showcase your product to leverage Mental Accounting.
If you want to spice your marketing up with a bit of customer psychology, you will love this article.
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People aren’t always great at managing their money, right down to how they think about their money. We have a tendency to sort and label our income and our expenses in ways that don’t always lead to the best financial decisions, and recognizing why and how your customers may construct these “mental budgets” can help you understand them better.
Mental Accounting and how you can apply it to your sales strategy?
Everyone makes and keeps mental budgets (some people more than others), and the fact that many consumers feel at least a little compelled to divide their money into different categories has some interesting implications (in Behavioral Economics, this is considered a form of “Mental Accounting,” a label used to describe the collection of cognitive strategies and biases that arise when people think about their money). Because consumers have this tendency to form different mental budgets, it leads them to assign purpose to their money in predictable ways, often without realizing it.
This concept was fleshed out in a 1985 paper by Richard Thaler, and has been greatly expanded since. One of the surprising findings about mental accounting that Thaler discussed was how consumers would not only subconsciously sort their money into mental budgets and accounts, but they would also feel like those accounts had meaning. As a result, people are hesitant to move money from one of these imagined budgets to another, creating artificial feelings of budgetary constraint. In other words, consumers would sometimes restrict themselves from buying something they wanted or needed simply because they felt that there wasn’t enough money left in an imaginary budget for it.
If this sounds a bit far-fetched, consider a 1996 study by Chip Heath (co-author of Made to Stick) and Jack Soll. They asked participants a series of questions that looked something like this:
Suppose that earlier this week you spent $50 to pay for a parking ticket. Would you purchase a $25 theater ticket to a show you want to see later this week?
What would you say? Now compare your answer to how you feel about this version:
Suppose that earlier this week you spent $50 to go to a sports event. Would you purchase a $25 concert ticket to a show you want to see later this week?
If you are like most consumers, then chances are that you would be more willing to buy the $25 ticket after paying for the parking ticket rather than the sports ticket. Why? Because we have at least a loose idea that the money for tickets to a game or to a show come out of the same mental budget (e.g. for entertainment), whereas the money for a parking ticket comes out of an entirely different budget. Because spending $50 on a game is a decent expense (for most of us), spending another $25 out of the same budget in the same week starts to feel uncomfortable.
Mental Budget Boundaries
Consumers subconsciously form mental budgets, but this doesn’t tell us what those budgets are necessarily intended for. Heath and Soll showed that consumers appear to have separate budgets for entertainment, food, clothing, health, and parking tickets, but these categories are by no means fixed. In fact, they probably vary a lot between people and depending on the situation. Furthermore, different types of budgets may overlap: if a customer thinks about their money in terms of “just for fun” versus “necessities,” these will blur with their budgets for food or for clothing (both of which could be used to buy either frivolous or necessary products).
One surprising way in which people tend to categorize their budgets is based not on how they intend to spend the money, but on how they got the money in the first place. This idea was explored in an unpublished paper by Suzanne O’Curry, who observed that consumers take into account the “seriousness” of money both when they receive it and when they spend it. Specifically, consumers try to match the seriousness of income with the seriousness of a purchase.
For example, if consumers are thinking about the money they make from their job (a serious source of income), they are more interested in spending it on necessities (a serious purchase). However, if they get some windfall cash, then they prefer to spend it on something more frivolous. For example, if you found $20 on the ground in a supermarket, you would likely be more motivated to buy an extra treat than to buy extra home supplies.
Similarly, Jonathan Levav and Peter McGraw found in a 2009 paper that many consumers may actually budget their money based on emotional reasons. Specifically, if they feel that there is a negative or guilty association with the money, consumers are motivated to spend it on necessities to avoid feeling more guilty. For example, the authors asked a group of college students how they would spend money given to them by a family member, but some students were told to suppose the family member was having financial difficulties. When the students associated the money with this added guilt, they were less likely to buy something frivolous or fun with it.
Mental Accounting Basics
An understanding of how and why customers may sort and spend their money based on mental budgets can help to motivate them. First and foremost, removing the sense that purchases are all coming out of the same mental budget can reduce some of the resistance that customers may feel towards buying more than one item.
If you have a wide array of products, particularly spanning the spectrum of “serious” to “frivolous” or from “necessities” to “for fun,” offering a mix (or forcing them to view a mix) can encourage purchasing across categories. Alternatively, if you don’t have a wide array of products, a similar result might be accomplished using some simple variety manipulations to give the sense that products are more varied than they may actually be. One simple approach which leverages a common online practice is by providing a wide array of product category key-terms on which to sort items.
Beyond having implications for your product offerings, recognizing mental budgets can help you optimize your coupon or gift card offerings. If your products tend to fall more into the necessities category, tell your customers that they have “earned” coupons, because the act of earning makes it seem like a more serious source of income. In contrast, if your products are more frivolous, try to cast your coupons as a surprise or as having been given to them because of luck. You might even have coupons with variable values that only become known when the customer accepts it. Not only does this give a sense that the coupon is a windfall, but it leverages the power of variable reinforcement, one of the most compelling ways to engage people’s interest (and an underlying mechanism for the addictiveness of behaviors ranging from gambling to mobile gaming).
- Consumers naturally budget their money, which means that retailers need to be careful to understand which budget(s) they are appealing to.
- Appealing to multiple budgets can encourage customers to spend more than if they felt they were only spending out of one budget.
- Consumers prefer more frivolous purchases over serious purchases when they believe their money came from a less-serious or more fun source, and vice versa.