Economic theory tells us a beer is a beer and it should be worth the same to you, regardless of your context.
And yet, when researchers asked two simple questions1 in a recent experiment, they found evidence that economic theory simply doesn’t hold when we are resource rich rather than resource poor.
Imagine you’re a participant in the experiment… Now imagine laying on a beach on a hot day when your friend offers to grab you an ice cold beer. I have two questions for you:
- How much would you pay for a cold beer from the small, run-down grocery store down the street?
- How much would you pay for a cold beer from the fancy resort hotel up the beach?
But there’s a catch: You only get the beer if your answer is equal to or more than the actual price of the beer at the given location.
If economic theory holds true, then if you want a beer you should be willing to pay a certain price for the beer from the grocery and a slightly higher price for the beer from the resort (since resorts usually demand premium prices).
But the experiment showed there is more to the story. If you have above average income, then you are likely willing to pay a statistically significant premium for the resort beer. But if you have below average income, then you are not likely to pay a statistically relevant premium for the resort beer.
It turns out that our concept of value changes when we’re relatively poor vs relatively rich.
When we are relatively poor, we ask ourselves what else we might do with the money we would have to spend for the beer from the resort. While $3 might be exchanged for a double cheeseburger, $6 might be exchanged for a double cheeseburger for me and one for my son. If I have to pay $6 for the same beer I could otherwise get for $3, then I can’t justify the expense because resources are scarce. The beer is still only worth $3 to me.
On the other hand, when we are relatively rich, we ask ourselves whether the pleasure of having an ice cold beverage on the hot beach is worth the premium price we will have to pay. Sure, $6 is more than $3, but if it is the only way I can have a beer, then all that matters is how much I want the beer. The tradeoffs do not affect us because regardless of whether we buy the beer, we can still afford double cheeseburgers for the family.
The same principles hold true when the resource is something other than money (like time or food), as well.
Why does this matter for you?
When your customers are making a choice about whether to take advantage of a discount on your next product, resource scarcity will affect whether the discount changes their purchase decision. Resource rich customers will care more about feeling like they are getting a good deal – a 50% discount will feel valuable, whether the product is $100 or $1000.
However, a resource poor potential customer will think very differently about a 50% discount on $100 vs $1000 because of the absolute value of the discount. $50 is very different from $500 for someone who lacks financial resources.
Always keep your target market in mind as you decide on pricing strategy in your business.
1 Source: Scarcity Frames Value, Perspectives on Psychological Science
It is incredibly difficult to translate academic research into actionable insight. No matter how hard I try to stay true to findings, the nature of research is that it is either reinforced or disproven over time. This is the latest in research from the Association for Psychological Science, and to get the best results, you should read the full paper if this topic interests you. Otherwise, you’ll just have to trust me.