Do you ever stop and think how strange “getting a deal” is when you buy? Clothes go on sale. House prices rise and fall. Candy at movie theaters comes in unusually shaped boxes. How do we know when we win or fail in commerce?
For marketers, this is a vital question, because influencing the purchase is the lifeblood of a company. For business leaders, negotiating deals is a daily challenge. To win at either, just control the “+1, -1″ psychology of the deal.
Consider these two events:
John is up for a promotion and expects a raise from $25,000 to $35,000 a year. His boss calls him in and explains they can only offer him $30,000 a year for the new position. John goes home, mildly disappointed.
Jane is up for a promotion and expects a raise from $25,000 to $35,000 a year. Her boss gives her a raise to $35,000. The following week, accounting lets her know this was an error, and they will have to reset her new salary to $30,000. Jane goes home that night, furious, and rewrites her resume.
Why was Jane more upset than John, if they both got an equal raise that ended up in the same place? Because Jane perceived two “loss” events — a lower raise than expected and having to give something back — while John perceived one loss, just a lower raise.
And here is the crux of understanding any deal. In “mental accounting,” a theory espoused by noted economist Richard Thaler, people strive to maximize pleasure and minimize pain. But we are horrible at logically seeing the real outcome, and instead keep a mental tally of a series of +1s and -1s along the way in any transaction. More positive events make us feel better; more negative ones worse. The accumulation of events in the positive or negative direction can influence our perception of the outcome. This is why parents don’t put all the Christmas presents in one wrapped box (because unwrapping more boxes make kids feel good), and why we use credit cards to roll up most of our monthly debts (because paying one bill minimizes the pain vs. paying lots of smaller bills). We love many presents and one bill. We hate one present and many bills. Even if both get us to the same place.
How can marketers use +1, -1 deal psychology?
The outcome is all that matters logically. But, as Thaler notes, an increase in a gain should be segregated into multiple events, and a loss should be integrated into one event, if we wish to maximize the pleasure of a customer.
Many marketers play this many-gains, few-losses game unwittingly with “sales.” Instead of pricing a dress at $50, a relatively low price (one “gain” for a consumer), a retailer will mark the price up to $200 and then put it on the rack on sale 75% off. Now, the consumer feels two “gains” — a 75% savings and relatively low price of $50. The outcome is the same, but the two-step sale approach is more likely to trigger a purchase. Smarter marketers such as Zappos extend the series of +1 events by adding extraordinary call center service and unexpected next-day shipping, all, of course, baked into the real price. The longer the series of +1s you can give a customer, the happier she will be.
How can you use deal framing in your business?
Business leaders often find themselves in the role of a customer, potentially being gamed by their partner/vendor/adversary/friend in a B2B deal. Contracts get written. Lawyers join calls. And the final answer requires understanding if it’s all a good “deal.” The way to use the +1, -1 strategy in B2B plays is to be cognizant that it may guide you into a trap — when the outcome is really all that matters.
In other words, the psychology of keeping score can lead you astray in judging the value of a business deal. Let’s replay the John/Jane scenarios, this time as a B2B adventure with larger budgets:
John runs a busy plastics manufacturing plant and is expecting a fast-growing, loyal customer who ordered $250,000 in products last year to order $350,000 this year. The customer says, sorry, I can only order $200,000. John, immersed in other orders, is disappointed but accepts the deal.
Jane runs a busy plastics manufacturing plant and is expecting a fast-growing, loyal customer to move from $250,000 to $350,000 in orders. The customer orders $350,000 in product, then a week later cancels $150,000 of the order. Jane, upset by this cancellation and immersed in other orders, tells the customer to take her business somewhere else in the future.
Similar to the personal raise scenario, in this case, both John and Jane ended up at exactly the same financial place: $200,000 in sales. But again, one of them felt two “-1″ negative experiences in the transaction that led her to kill the relationship. Is this rational? Of course not. But human cognition often keeps the wrong score.
Thaler calls this the “concept of the reference outcome” — in other words, the outcome we achieve is always compared to the original price or value we expected. Marketers who influence that original perception in the right direction will win. Businesspeople who fall into the trap of comparing an outcome to the wrong original perception may miss solid opportunities.
And for anyone conducting a transaction, the best advice is this: ignore the +1s and -1s along the way, and instead calculate what are you really gaining at the conclusion of the deal?