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MIT Retail Study: Sell The Savings

With retailers trying to lure customers by deeper discounts than competitors, Shane Frederick at the MIT Sloan School of Management suggests a better approach: give customers specific examples of what they could actually do with the savings.

His recent research challenges the conventional wisdom that consumers “spontaneously consider opportunity costs,” he said, and that cash savings have a greater psychological impact than any specific use of that cash. According to Frederick, retailers or brands trying to persuade consumers to buy the cheaper of two options should provide the shopper more explicit cues about what they could do with that extra money — perhaps even bundling the less-expensive product with something else that the shopper could purchase with the price savings.

Frederick recognized the effect when he was torn between two audio systems, although one was about $300 less. The lower price alone was not decisive — until a sales associate noted that that the $300 savings could be used to buy 30 new CDs. “I was stunned at the huge effect that had on my preference,” Frederick said.