bottom-dollar-effect

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

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.

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.

Read More:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here