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.
|Definition||The 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:
- Current income – income or cash in a bank account.
- Current assets – including homes, investments, emergency funds, and other less liquid assets.
- 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.
- 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.
- 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.
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