bottom-dollar-effect

What Is The Bottom-Dollar Effect And Why It Matters In Business

Business / By / October 28, 2023

The bottom-dollar effect describes a tendency among consumers to dislike purchases that exhaust their remaining budget. If a consumer spends the last $50 in their bank account on dinner at a restaurant with friends, they may enjoy good food and good company. But after the meal, they feel dissatisfied because the meal has exhausted the last of their funds. Here, the negative emotions associated with running out of money have been applied to the meal itself. This is known as the bottom-dollar effect.

AspectExplanation
DefinitionThe Bottom-Dollar Effect is a cognitive bias that influences decision-making, particularly in auctions and negotiations. It occurs when individuals become fixated on obtaining a deal or winning an auction at the lowest possible price, often to the point of making irrational decisions. This bias leads individuals to focus primarily on the price rather than the overall value or quality of the item or service they are acquiring. As a result, they may pass up opportunities for better deals or superior options in pursuit of the perceived “bottom dollar” or rock-bottom price. The Bottom-Dollar Effect can lead to suboptimal choices, buyer’s remorse, and missed opportunities for acquiring higher-quality goods or services. It is a common phenomenon in various consumer contexts, including online shopping, real estate bidding, and negotiations for products or services. Understanding this bias is essential for both buyers and sellers to make more informed decisions and avoid pitfalls associated with fixation on the lowest price.
Key Concepts– Fixation on Price: The primary concept is the fixation on obtaining the lowest possible price. – Quality vs. Price: The conflict between prioritizing price over quality or value. – Competitive Context: The Bottom-Dollar Effect is often observed in competitive situations like auctions or negotiations. – Irrational Decisions: It can lead to irrational decision-making, driven solely by the desire for a deal. – Regret Aversion: People may later regret their decisions if they realize they sacrificed quality for a lower price.
Characteristics– Price Obsession: Individuals focus intensely on achieving the lowest price. – Competition: It is more prevalent in competitive environments where others are also bidding or negotiating. – Limited Perspective: The fixation narrows their perspective, potentially overlooking other important factors. – Risk of Regret: There is a risk of post-purchase regret if the chosen option does not meet expectations. – Comparative Shopping: The Bottom-Dollar Effect drives individuals to engage in comparative shopping.
Implications– Missed Opportunities: Individuals may miss out on better quality products or services that offer greater value. – Regret: Buyer’s remorse can set in if the purchased item fails to meet expectations due to fixation on price. – Price Wars: It can lead to price wars in competitive markets as sellers attempt to attract price-conscious buyers. – Quality Sacrifice: The emphasis on price can result in sacrificing quality or features. – Reduced Satisfaction: Overly fixated individuals may be less satisfied with their purchases.
Advantages– Cost Savings: In some cases, the Bottom-Dollar Effect can lead to cost savings on necessary items. – Budget-Friendly: It helps individuals stay within budget constraints. – Deal Sensitivity: People are more likely to spot and take advantage of good deals. – Resource Allocation: It encourages resource-conscious decisions. – Market Competition: It fuels competition among sellers, potentially benefiting consumers.
Drawbacks– Quality Sacrifice: The primary drawback is sacrificing quality or value for a lower price. – Missed Quality: Individuals may miss out on higher-quality options. – Regret: It can lead to buyer’s remorse if the purchased item doesn’t meet expectations. – Time-Consuming: Comparative shopping driven by the Bottom-Dollar Effect can be time-consuming. – Limited Perspective: The fixation on price can prevent individuals from considering other important factors.
Applications– Online Shopping: The Bottom-Dollar Effect is common in online shopping, where buyers often compare prices extensively. – Real Estate: In real estate negotiations, buyers may focus on driving the price down, potentially missing out on better properties. – Automotive Purchases: Car buyers may obsess over price negotiations while overlooking important features. – Retail Sales: In-store sales and promotions can trigger the Bottom-Dollar Effect as consumers seek bargains. – Auctions: Competitive auctions are classic environments for the Bottom-Dollar Effect, where bidders aim to secure the lowest winning bid.
Use Cases– Online Electronics Purchase: A consumer searching for a new laptop becomes fixated on finding the cheapest option and overlooks models with better performance and features in their price range. – Real Estate Bid: During a bidding process for a house, a potential buyer focuses solely on reducing the purchase price, potentially missing out on a property that better suits their needs. – Car Negotiation: A car buyer engages in price haggling to secure a lower price but ignores additional safety features and warranty options that could enhance their ownership experience. – Black Friday Shopping: A shopper on Black Friday rushes to get the lowest-priced items, disregarding the quality and suitability of the products. – Auction Competition: In an online auction for collectible items, bidders become fixated on outbidding others and winning at the lowest possible price, even if it means overlooking the item’s condition or rarity.

Understanding the bottom-dollar effect

Money management is a vast subject, but in a perfect world, purchasing decisions should be made with rational logic. However, consumers experience the bottom-dollar effect because they tie emotions to money. They feel temporarily elated when purchasing something they want and then despondent when the money has left their account. Despondency, as we have seen, is most pronounced when bank account balances run close to zero.

Three types of mental accounting in the bottom-dollar effect

Consumers maintain three mental “accounts” when considering or managing purchases:

  1. Current income – income or cash in a bank account.
  2. Current assets – including homes, investments, emergency funds, and other less liquid assets.
  3. Future income – including retirement income, promotions, and expected windfalls such as inheritance.

It’s important to note that exposure to the bottom dollar effect is highest in the current income model and lowest in the future income model. This is because consumers facing fund exhaustion will use funds from their current income and in some circumstances, will also sell assets.

Future income is the least affected for reasons which will be explained in the following sections.

The bottom-dollar effect in marketing

Marketing teams who understand the bottom-dollar effect can use it to their advantage.

With an understanding that people associate negativity with fund exhaustion, they can time marketing messages to coincide with periods where consumers have greater access to funds. 

For businesses endeavoring to attract new customers, this is particularly salient. They do not want the first interaction a consumer has with their brand to be a negative one.

Periods that businesses should target include:

  • Friday and Saturday, before consumers have had a chance to exhaust discretionary weekend funds.
  • Payday.
  • End of financial year, where many receive tax refunds.

Research published in the Journal of Consumer Research has validated these spending periods by linking them with the mental accounting mentioned in the previous section. The study found that the bottom-dollar effect increases as the effort required to earn money increases. 

Importantly, the bottom-dollar effect decreases as the gap between budget exhaustion and replenishment decreases. In other words, consumers experience less pain when spending their last few dollars if they know replenishment is imminent.

How can businesses use these insights? It begins with deep research into buyer personas. The most successful marketers will segment their target audience according to specific characteristics such as earning capacity, frequency, and spending habits.

Key takeaways:

  • The bottom-dollar effect involves consumers associating negative experiences with purchases that exhaust their funds.
  • The bottom-dollar effect is an emotional response to money management. It has no basis in rational, logical decision-making.
  • Businesses can use the bottom-dollar effect in marketing campaigns to target buyers at different stages of the buying journey. Ultimately, this will be determined by the recency or availability of funds in their bank account.

Key Highlights of the “Bottom-Dollar Effect”:

  • Definition: The bottom-dollar effect refers to consumers disliking purchases that deplete their remaining budget, leading to negative emotions associated with those purchases.
  • Emotional Money Management: Consumers tie emotions to money, feeling elated when making purchases and despondent when funds are spent, especially when nearing the bottom of their budget.
  • Three Mental Accounts:
    • Current Income: Money in the bank account.
    • Current Assets: Less liquid assets like investments.
    • Future Income: Expected future earnings and windfalls.
  • Impact on Purchase Timing: Marketing teams can use the bottom-dollar effect to their advantage by timing messages during periods when consumers have access to more funds, avoiding negative associations with their brand.
  • Targeting Strategies:
    • Days Before Fund Exhaustion: Target consumers on Fridays or Saturdays before they’ve depleted weekend funds.
    • Payday: Engage consumers on their payday.
    • End of Financial Year: Focus marketing efforts when tax refunds are expected.
  • Research Insights: The effect increases with the effort needed to earn money, and it’s less pronounced when the gap between budget exhaustion and replenishment is small.
  • Effective Marketing: Successful marketers segment their audience based on earning capacity, spending habits, and other characteristics, tailoring messages accordingly.

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

convergent-vs-divergent-thinking
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.

Critical Thinking

critical-thinking
Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.

Biases

biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Second-Order Thinking

second-order-thinking
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Bounded Rationality

bounded-rationality
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Dunning-Kruger Effect

dunning-kruger-effect
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Lindy Effect

lindy-effect
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.

Antifragility

antifragility
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).

Systems Thinking

systems-thinking
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.

Vertical Thinking

vertical-thinking
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.

Maslow’s Hammer

einstellung-effect
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).

Peter Principle

peter-principle
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.

Straw Man Fallacy

straw-man-fallacy
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Streisand Effect

streisand-effect
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.

Heuristic

heuristic
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Recognition Heuristic

recognition-heuristic
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.

Representativeness Heuristic

representativeness-heuristic
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.

Take-The-Best Heuristic

take-the-best-heuristic
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.

Bundling Bias

bundling-bias
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.

Barnum Effect

barnum-effect
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.

First-Principles Thinking

first-principles-thinking
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

ladder-of-inference
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Goodhart’s Law

goodharts-law
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.

Six Thinking Hats Model

six-thinking-hats-model
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.

Moore’s Law

moores-law
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Value Migration

value-migration
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.

Bye-Now Effect

bye-now-effect
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.

Groupthink

groupthink
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.

Stereotyping

stereotyping
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.

Murphy’s Law

murphys-law
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”

Law of Unintended Consequences

law-of-unintended-consequences
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.

Fundamental Attribution Error

fundamental-attribution-error
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.

Outcome Bias

outcome-bias
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.

Hindsight Bias

hindsight-bias
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.

Read Next: Biases, Bounded Rationality, Mandela Effect, Dunning-Kruger Effect, Lindy Effect, Crowding Out Effect, Bandwagon Effect.

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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