Imagine you’re in a store thinking about buying a calculator that normally sells for $15 when a salesperson informs you the company’s other store, located 20 minutes away, has the same calculator available with a $5 discount. Would you make the drive? Now imagine the same situation with one exception: the calculator you’re considering normally sells for $125. Now would you drive across town to save $5?
Some 35 years ago, Daniel Kahneman and Amos Tversky, pioneers in the field of behavioral economics, set up that very experiment with about 200 shoppers. The result? Nearly 70% of people were willing to drive across town to save $5 when the full retail price was $15, whereas just 29% were willing to make that effort when the price was $125.
That’s completely irrational, right? In both situations, there was an opportunity to save $5. And yet numerous studies since then have confirmed their findings: people tend to value a high percentage-off deal on a low-cost item more highly than a deal on a more expensive item where the actual dollar savings might be just as valuable or even more valuable.
I’m embarrassed to admit that I confirmed that finding myself recently when shopping for a gift.
Before heading out for a quick shopping trip on my lunch hour, I received a coupon for $2 off a greeting card. I was happy to get that coupon since I was already planning to go to that particular store to buy a birthday card that I figured would cost $4. Great, 50% off!
However, my first stop was at a different store to buy the gift. For some reason, I didn’t even think to look for a coupon. It was only when I got back to my office that I realized I should have searched for a discount. To satisfy my curiosity, I did a quick search and found a coupon for $3.50 off. At first, I was mad at myself. Why didn’t I look for a coupon before I went to the store? But my next thought was that saving $3.50 on a $50 purchase wasn’t a very big deal.
Think about that. I was happy to get a $2 coupon for a $4 item, but I easily dismissed a coupon worth even more because it amounted to a far smaller percentage of the purchase price.
Again, completely irrational. And I write about money for a living!
I’ll give myself a little bit of credit, though, for how I bought a car a number of years ago. I found a low-mileage two-year old car, researched what it was worth, and struck what seemed like a fair deal with the salesperson. At the end of our negotiation, I also asked for a full tank of gas, which he agreed to. But when I picked up the car a few days later, the tank was just half full.
I was tempted to let it go. Twenty dollars seemed so minor compared to the $18,000 I was paying for the car. Even though I felt a little embarrassed about it, I asked him to honor our deal and he agreed to top off the tank.
For many of us, it’s tempting to dismiss the opportunity to save $20 on an $18,000 purchase or $3.50 on a $50 purchase because the savings amounts to such a small percentage of the purchase price. But we would never miss the opportunity to save the same dollar amount when the savings amounts to a higher percentage of the price.
The solution? Change the way you frame the opportunity. Don’t always think in terms of percentages. Think about the absolute dollar amount, and how happy you’d be to save that much on an item that costs much less.
What are some other examples that come to your mind—perhaps situations you’ve experienced yourself—where saving a large percentage on an inexpensive item seemed more worthwhile than saving a much smaller percentage (but the same or even larger absolute amount) on a more expensive item?
Hey Matt. I like the way you framed this. My Grandma used to tell me that she never paid full price for anything (as much as she could avoid it). I try to live my life like that simply to be a good steward. I struggle between being too cheap and “getting what I pay for.”
I do, however, invite any savings, as much as reasonably possible. I’m out to buy a car soon and I’m praying I do a good purchase!
I’m with your grandma, Thomas. I try not to pay full price for things. That said, the least expensive option isn’t necessarily the best deal if the quality isn’t great.
I hope the car-buying goes well. These days, it’s easier than ever to get the info you need to figure out a fair price in advance. I bought a used car last summer. As much as dealers seem to promote no-haggle buying, I found there was still some wiggle room. As I like to say, you’ll never know what you can get unless you ask. And always remember, your strongest position is being willing to walk away if the price doesn’t seem right.
I find a similar situation in reverse – where I always annualize the cost of something to evaluate if it feels like it is worth it. That black Friday subscription to Hulu is only costing me 2.99 a month. Do I expect to get my money’s worth – if the cost is $36 for the year, and I only think I will spin up an episode here or there? Or is Netflix worth the $17.49*12 = $210 per year? Maybe I’ll join for 6 months, and then take a break for 6 months.
I like that approach, Tom. And it’s a good idea to inventory all subscriptions from time to time to re-evaluate whether we’re still using them, and whether they’re worth the price, which is surely higher than when we first signed up!