Why do we suddenly feel the urge to acquire superfluous goods? What makes us approach a product in the market?
Have you ever come across a product that you wanted to purchase or ended up purchasing because of its “rewarding” discount? Many of us are familiar with this phenomenon and perhaps experienced a great sense of benefit or value through encountering such an offering. This marketing tactic is heavily associated with the behavioral economic concept of reference dependence. Reference dependence is a behavioral economic theory that revolves around the idea that people evaluate outcomes relative to a reference point.
Types of Reference Dependence
The theory mainly consists of two components: internal reference and external reference.
Internal reference: The internal aspect of reference dependence expands upon the idea of consumer purchase practices that are mainly driven by past purchasing experiences. For example, a consumer remembering a certain price of a product and basing its subsequent purchases on it would be considered internal referencing.
External reference: The external aspect of reference dependence correlates to the reference triggered by external incentives. For instance, discount percentages or product appearances of a displayed product would be some of the numerous factors that contribute to the effects of external reference.
In the case of product costs in the market, the external reference dependence predicts an individual will feel a sense of gain when the price is lower than the reference price (original price). In contrast, when the price is higher than the reference price, people would discern loss respectively.
Figure 1: Amazon Skechers Men's Sneaker Sale
For example, in this sales deal, we are able to observe that the product is 37% off from its original price. The reference price of this product would be the initial price of 65$, while the comparative price would be $40.63. When examining the two prices, we are able to derive that the magnitude of our monetary benefit would be $24.37.
What are some purchases you have made in the past that have been on a sale?
This strategy is often implemented in the market to gain the consumer’s attention. Take a look at the scenario below.
Figure 2: Shop A and B
Shop A and Shop B are two sports shops that sell the same soccer ball.
Which shop would you be more inclined to purchase from?
Even if the retail prices of both soccer balls were 10$, shop A providing the consumers with a reference point of $30, being discounted into $10, would make the product seem much more lucrative and worthy of buying.
Possible Dangers of Reference Dependence
Although we often come across this phenomenon, there are risks that arise when not minding such marketing tactic. Selling sites, such as Amazon, often utilize the notion of Reference Dependence in order to take advantage of our perceived sale prices. For instance, a blender on Amazon, in the image below, currently holds its sale price at around $59.99.
Figure 3: Amazon Ninja Nutri Blender
A typical consumer would most likely examine this product to appear as a bargain because the list price is discounted from $119.99 to $59.99. However, in actuality the average price of this product, according to camelcamelcamel.com —a website that keeps a record of the history of amazon product prices—, has been indicated to be close to $60.00 for nearly two consecutive years. This means that the so-called “discount displays” that Amazon provides you with are not necessarily portraying the actual value of products, but rather providing you with false reference points to encourage purchases.
Figure 4: Amazon Ninja Nutri Blender Price Fluctuation
Although it is important for us to base our purchases off of certain reference points, we must be mindful not to make our acquisitions impulsively from a single given external reference point. For us consumers to be responsible shoppers in the future, it is imperative that we decipher the intrinsic value of the product from multiple perspectives and acquire it with designated necessities.
Always question what you buy. Remember, in a market environment the seller always has the upper hand.