Everything is Relative When You’re Down to Your Last Dime
Pictured above: Marketing researcher Robin Soster studied product satisfaction when spending is tight. | Photo by Matt Reynolds
That last dollar in your wallet carries more weight than just spending power. It affects the way you feel about purchases, which can be valuable knowledge for marketers and consumers alike.
Marketing researcher Robin Soster found that spending our last dollar leaves us less satisfied with the product, and it has very little to do with the product purchased. Her research shows that consumer satisfaction is affected by the depletion of a person’s finances. If you bought the exact same item when you had $100 in your pocket (or bank account) rather than $1, then you would like it. Or like it more.
“For most people, parting with money causes discomfort,” Soster said. “This resonates with nearly everyone’s experience, and a lot of research has confirmed it. Our research shows that letting go of that last dollar is especially painful, and as this pain increases, satisfaction with the product purchased decreases.”
Soster teaches consumer behavior with a research focus on mental accounting – how we think about costs and benefits.
Lately, her focus has been on “pain of payment,” an expression used by researchers in the fields of marketing and economics to describe the nearly ubiquitous discomfort consumers experience when they spend money. The results have significant implications for the effective timing of consumer marketing incentives such as sales and coupons.
In “The Bottom Dollar Effect: The Influence of Spending to Zero on Pain of Payment and Satisfaction,” published in the Journal of Consumer Research, Soster and co-authors Andrew Gershoff at The University of Texas at Austin and William Bearden at the University of South Carolina extend a few basic and empirically documented phenomena, namely that consumers associate spending with psychological pain and that they make spending decisions differently during periods of economic paucity compared to times of abundance.
Knowing that many – if not most – people usually spend rather than save those bottom dollars, Soster and her colleagues asked: Does a purchase when a budget is approaching exhaustion bring the same degree of happiness as when the same purchase is made when the budget is flush?
The researchers predicted people with fewer remaining dollars would feel more payment pain than those with resources left over. This pain, in turn, would lead to less satisfaction with the purchase.
The predictions were based on prior research of reference points, which suggested that people might use their available resources as a reference when making spending decisions. People with larger budgets perceive costs as smaller, while the very same costs are perceived as larger for those spending the last of their resources.
“Since we predicted pain of spending to be the primary driver for the bottom-dollar effect,” Soster said, “we looked at situations that might increase or reduce this pain.”
In two pilot studies, adults were given a budget and spending simulation. Participants were told that their budgets had dwindled to various levels – $10, $22, $34, $46, $58, $88. The researchers then informed the participants that they were to purchase a $10 movie ticket.
The researchers asked questions about spending and found that respondents’ aversion to spending grew as their budget balances declined.
The researchers’ next study looked more closely at the influence of bottom-dollar spending on product satisfaction. Soster and colleagues used a virtual film festival in which half of the participants exhausted their budgets with the purchase of the final film, while the other half had money left over after the film’s purchase. While all participants watched the same three films, those who spent the last of their budgets on the final film didn’t enjoy the film as much as those with money leftover.
“While the purchase of the third film reduced all participants’ balances by the same amount, satisfaction was attenuated only for those whose budget balance was reduced to zero,” Soster said. “We believe that these differences in satisfaction were driven only by the pain associated with spending one’s last dollar. The product feels more costly, even though it wasn’t, and this feeling, not the quality of the actual movie, determined how satisfied they were.”
In the next study, to further explore whether this pain was the driving force behind differences in satisfaction, the authors had participants earn the resources spent in the film festival. Some participants felt as though the earning tasks were difficult; others perceived them as easy. In this study, resource availability influenced satisfaction when tasks were viewed as difficult, but not when tasks were perceived to be easy.
“If it is especially easy for me to recoup my resources, spending seems to be less painful,” Soster said.
In another experiment, bottom-dollar spenders who were told their resources would be replenished soon felt less spending pain. Their satisfaction was unaffected — despite spending their last dollar.
Surprisingly, the bottom-dollar effect also arose for participants with plenty of resources remaining, if they were told that their budgets would not be replenished for a long time. Even though these participants had not spent their bottom dollar, their pain of payment was higher and satisfaction was reduced when future resources were uncertain.
What happens when people receive “free” money – unanticipated work bonuses, gifts from family members, or income tax refunds? The researchers found that these windfall gains stemmed the bottom-dollar effect, since spending no longer exhausted budgets.
The findings matter, Soster said, because beyond the obvious possibility of placing ourselves in the uncomfortable position of having to go without basic necessities for a while, there may be other reasons to wait until we’re financially flush before making a purchse.
“Although waiting a day or two for one’s paycheck may be a difficult exercise in self-control,” she said, “our findings suggest that this waiting may actually increase happiness.”
Regardless of whether consumers choose to follow this advice, simply understanding the bottom-dollar effect may help mitigate the pain of spending and its subsequent influence on satisfaction, Soster said.
Lessons from her research may be even more important for retailers and marketers. Both want to avoid situations in which consumers feel like they’ve received a “bad deal,” which makes them less likely to buy a product again.
In light of this, Soster said companies might consider adjusting their promotional strategies. For example, heavy advertising might yield greater sales at the beginning of the month, after many people have just been paid. This strategy could also apply to seasonal events, such as Christmas, when many people exchange gifts, or in early spring when people have just received their income-tax refunds.
Conversely, at the end of the month, when budgets have likely dwindled and consumers are more likely to be approaching their bottom dollar, marketers might find special pricing incentives and coupons more effective strategies.
“In other words, anything that accommodates the potential for fluctuating payment pain may not only increase sales, but also satisfaction,” Soster said. “In fact, these types of incentives may work in a manner similar to windfall gains — preventing or at least easing, any pain associated with bottom-dollar spending.”
Listen to a podcast of Robin Soster discussing her research on the bottom-dollar effect.