In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp bring you a December warning at least as important as the one given by Jacob Marley: Beware! Advertising gurus and marketing maestros have peered into your psyche and they know how to make you buy. And buy. And buy more. And every year, when shopping season arrives, they pull out every tool in their arsenal.
One of their favorites is this classic: showing you an array of choices with different prices and the lowest one, whatever it is, suddenly seems cheap. Or at the higher end, they can make an "upgrade" feel like a minor extravagance. All of which has zero to do with the item's real value or your financial situation.
A full transcript follows the video.
This video was recorded on Dec. 5, 2017.
Alison Southwick: The next one is the decoy effect. Have you heard about this?
Robert Brokamp: No.
Southwick: It turns out -- and this is going to be a theme that's going to pop up a lot -- that we, as humans, have a hard time telling how much something is worth unless we have some sort of reference point or context. I'm looking at this microphone. I have no idea how much this microphone in front of me is worth. I have no experience with microphones. I just talk through one. I've never bought one. And marketers take advantage of this in a number of different ways.
The classic example. Let's say we're at the theater watching The Last Jedi because all three of us are going to be doing that next week.
Brokamp: By the way. When I put my ticket in the checkout, I got the timer. I had six minutes to buy that ticket.
Southwick: You had six minutes and you got half off because you bought it on On Cyber Monday.
Brokamp: On Cyber Monday. We're not sure I got an actual ticket, but I hope so. I only had six minutes to decide! I had to buy it!
Southwick: There we are. Your ticket does work. There we are waiting, and you decide you want some popcorn. They only offer two sizes. The small is $2.00 and the large is $7.00. And you're like, "Ugh! You know what? A small is enough. I'm just going to get the $2.00 one, because you're Bro." Well, it's a pretty big price difference, so you're just going to be like, "Well, whatever."
Let's say, though, that they offer a small for $2.00, a medium for $7.00, and then a large for $8.00. You're going to look at the prices, now, and you're going to be like, "Well, for just a dollar more, I can have a large popcorn."
This is like a classic example. Another example comes from Williams-Sonoma (NYSE: WSM) and the bread maker. Bread makers were a pretty big deal in the '90s.
Brokamp: Huge deal.
Southwick: But before they were a big deal, Williams-Sonoma were the first ones to create the bread maker. They put it on the market for the first time. They decided to price it at $275, but no one bought it, even though we all love bread. Who doesn't love fresh baked bread?
A research firm told them, "You should make a slightly better, bigger bread maker and retail it at twice the price." And sales took off for the original bread maker. For the lower-priced bread makers because people saw the more expensive bread maker, and it gave them a reference point for how much a bread maker should be worth, and they were like, "Well, we'll just go for the cheaper one."
Another example of this is the Neiman Marcus Christmas catalog. The Christmas book. Neiman Marcus has pretty expensive stuff, whether you're aware of that or not. Like $300 rabbit fur earmuffs.
See who's saying "oh, my goodness" to that. Well, an aspect of the Neiman Marcus catalog every year is its fantasy gift section. One example is a private New Year's Eve party for 300 people in the Knickerbocker Hotel for $1.6 million.
Brokamp: They put it in a catalog?
Southwick: Yeah, they put it in a catalog, so it's like crazy stuff. I also have a side note, here. Do you think I can say "FU" in our podcast, because I don't think I have ever said FU to a catalog? So, there's all these extravagant gifts -- less than a dozen of them. They describe the gift and then in the catalog they say, "Here's the feel-good factor." You're supposed to think, "Here's the charitable aspect of it."
One of the things for sale is a pair of Rolls-Royces for $900,000. The feel-good factor is that a whopping $1,000 of your purchase is going to go to a Neiman-Marcus foundation. If making a donation of $1,000 after buying $900,000 worth of Rolls-Royces makes you feel good, you're a horrible person. If you want to buy a nice car, fine. Buy a Rolls-Royce. But don't put yourself on Santa's good list because $1,000 of your purchase went to a charity -- 0.001%. That's how the math works out. Ugh! That's a side note but I thought it was worth mentioning.
The psychology at work, here, is that it does provide PR. It's like, "Oh, I can't believe all these amazing" -- that's crazy. That's outrageous. There's a PR reason why they do this, but if you're flipping the pages of the Neiman-Marcus catalog, after you've considered spending $1.3 million on a New Year's Eve party, suddenly the $300 [rabbit] fur earmuff doesn't seem so extravagant. They seem much more reasonable.
Another common use of the decoy effect is the upsell. For just a little bit more, you can have... the decoy effect is everywhere. You're going to see it a lot in pricing.