← The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics
The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics
524. Relativity in Action: Why Your Brain Needs Comparisons to Decide
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In this episode of The Brainy Business podcast, Melina Palmer revisits the powerful concept of relativity, a cornerstone of behavioral economics that shapes how we perceive value through comparisons rather than absolutes. Originally aired in 2018,...
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Have you been thinking about diving deeper into behavioral economics? Now is the perfect time. Our Virtual Applied Behavioral Economics Certificate from Texas A and M University is enrolling now, and I'm going to be teaching both foundations of behavioral economics and pricing strategy and product development this fall. Both courses run just once a year and they start September 5th. You will learn directly from me, including the option of live virtual office hours, and you get to be a part of a global cohort of curious brainy professionals from around the world. Get all the details and claim your spot at HBL Tamu Edu. That's HBL like Human Behavior Lab, TAMU like Texas A and M University Edu and click on Certificate Program. Your future self will thank you and when you're ready, let's start the show.
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Welcome to episode 524 of the Brainy Business Understanding the Psychology of why People Buy. In today's episode, I'm excited to talk with you about the concept of relativity. Ready? Let's get started.
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You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer.
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Hello.
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Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. This refreshed episode, which originally aired back in 2018 as episode 12, one of the earliest foundational episodes of the show, is all about relativity, how we determine value not based on absolutes, but through comparisons. This idea is at the core of behavioral economics and how pricing strategy works in the real world. So why bring it back now? Because in just a couple days I'm going to be sharing something really fun. A crossover episode from Choiceology on Left Digit Bias, where I had the honor of being a guest. These episodes are a perfect pairing, especially when you consider how our brains use shortcuts to evaluate what something is worth. As I share in my book the Truth About Pricing, relativity and anchoring are essential tools for crafting offers that fit feel like a great deal, even when they're not objectively cheaper. As you listen today, I encourage you to keep this question in mind. How can you intentionally set the comparisons your customer sees to make your best offer? That product or service you really want to sell feel like the obvious best choice really quickly. Before we get into this episode, I want to be sure you know that there are links in the show, notes for my top related past episodes and books, ways to get in touch, and more. It's all within the app you're listening to and@the brainybusiness.com 524 now let's jump right in and learn about relativity.
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While I do love Einstein, this is different than his theory of General Relativity, which is all about gravity, space, time and other physics fun in the case of behavioral economics, Relativity is about value. I have of course talked about value a lot on the podcast, including episode eight titled what Is Value? Which also talks a little about relativity. This also came up in episode five, the Truth About Pricing and the whole It's not about the Cookie series here. Today we're going to dig deeper into relativity to make sure you really understand what it is. And then I'll get into all the examples for varying industries and circumstances and how you can apply this concept into your business and life. So what is relativity and how does it apply to value? The human brain has a really difficult time valuing one off items, as in it can't. Instead, your brain needs to make comparisons in order to assign value to things and then make a decision about how to proceed. Let's say I've invented a great new widget. There's nothing like it in the world. It has no comparison point. It's novel and exciting and amazing. I want to sell it to you and I ask how much would you pay for this? What sort of questions would you ask me before naming a price? Maybe what do I use it for? How big is it? How small is it? Do other people have one? How many are available? These are all questions to help you relate that thing to all the other things around and try and assign a value to it. When it comes to buying, it's all relative. Remember the $200 grilled cheese from that episode on Value? How do you know that's expensive? Because you can relate it to other sandwiches and the ingredients used to make a grilled cheese at home or or other expensive meals which are typically still under $100. Our brains are constantly making comparisons between items and as with everything, it seems they're not always the most logical. Here is a simple example to show you how these relative values can shift. Imagine you're at a store and you pick out a spatula you want to buy. It is $16. As you're standing in line, you remember you've seen the exact same spatula at a store across town for $1. Do you put the one in your hand back and go to the other store to buy the cheaper spatula or do you proceed with your purchase right now? Now here is a new experience you're going to a formal event soon and have decided it's time for a new little black dress. You find the perfect one, makes you feel amazing, and you decide to buy it. It costs $500, but you're okay with the investment. While you're standing in line, someone says to you, you know you can get that exact same dress for only $485 at the shop across town. What do you do? Do you put it back and drive across town to buy the less expensive dress, or do you go ahead and just buy it now? If you are like most people, you would have said that you wanted to put back the spatula and drive across town to save $15, but you would not do the same thing with the dress. Why? In logical Traditional economics, a dollar, or in this case 15, should elicit the same exact behavior for you regardless of the item it's attach. But of course it doesn't. The relative price of the item that you're buying impacts your behavior. $15 compared to $1 seems like much more than $15 compared to 500. But why does that matter? The truth is, it shouldn't. If our brains were more logical, the real question would be what does $15 mean to me compared to the time to drive across 10 town? Years ago, I wrote a blog post about gas prices and auto loan payments. It's very common for people to be willing to drive across town to the cheaper gas station to fill up their tank. I personally know people who will drive an extra 10 minutes to save 10 cents a gallon. Okay, let's say you have a car with a 15 gallon tank, which is the average for a large sized car. You're saving $1.50 if your gas tank is completely empty when you get there to fill up. And of course, I'm not even going to try to extrapolate just how much gas you're burning to get across town to save that $1.50. But I'm willing to guess it's enough to eat into at least some of that gain. While at the credit union, we regularly ran a promotion where we would refinance an existing auto loan and beat the rate by 1%. And that's what prompted me writing the post I'm talking about here. Many people, the same ones who would drive across town to save 10 cents a gallon, would say 1% wasn't worth the time to fill out an application and refinance. It was a lot of work. And how much could it really save? Because you apply for auto loans much less often than you fill up your gas tank, relativity comes into play as to how impactful it would be. That's what your brain starts to think. Let me tell you just how much you could really save using a simple online calculator. Let's say you had a $20,000 auto loan. If it was at 8% interest, you'd pay $10 more a month than if you had a loan at 7% interest. That means you could save $120 a year by taking a few two minutes to fill out the application online and refinance the car, probably in less time than it would take to drive to the cheap gas station across town and fill up the tank. But again, you consider this 10 cents a gallon as something that is relatively more than the effort that goes into applying for an auto loan. Silly but true. That's relativity and your brain at work. Here's one more example to show you just how far reaching this is. In the Olympics earlier this year, many athletes made it onto the podium. As you know, there are three people or teams depending on the sport, who make it onto the podium. Gold, silver and bronze. It's pretty easy to know who the happiest person is on the podium. That's gold for sure. But who is the next happiest? And if you were to guess at who would be actually angry while standing on the podium, who would it be? That's right, silver medalists are often angry or crying at their bad luck, while the bronze they're just happy to have made the podium. So why would silver be less happy than bronze medalists who they technically did better than? It's because they almost won. They were so close to the gold but fell short. I've linked to a Daily Mail article I found of silver medalists pouting back at the London Olympics. If you want proof this is a thing or just a little laugh, I also have links in the show notes for some books and articles which include more examples of Relativity and if you want to read up on that. But for now I want to just transition into your business and how you can apply this concept into your company. If you own a retail shop of some kind, you should absolutely be incorporating Relativity into your layout and pricing plan. Do you remember last week when I talked about buying back to school clothes? It's a great example of how anchoring and adjustment works together with relativity. So here's a little refresher. Let's say you decided to do your shopping at Target because they have a little bit of everything school supplies and kids clothes at affordable prices. On your way in, you see a child's T shirt at the door for $99. You might think, whoa, Target's prices have gone way up. I'm not sure I can afford to buy them here this year. And when you get to the clothes section, you're pleased to see the shirts are on sale and around $40 apiece. So you stock up and get three because that was just a little more than the price of one shirt regularly. But was it? What if I told you the shirts were $25 apiece last year? Relative to 25, 40 seems high. However, the store put something even more expensive, the 99 shirt, in a place where it was very prominent and you were definitely going to see it to reset your anchor and establish a new relative price. So now $40 seems like a great deal. They don't want you to buy the $99 shirt. Let's be clear. They'd probably be happy if you did. But that's not its purpose. Its sole purpose in life is to make the other prices seem low so you buy more and feel better about it. For you and your business, you need items that are similar to each other at varying prices and to strategically place them throughout the store. If you only have one of something, it can turn into an expensive doorstop very quickly. Let me explain. Let's say you sell small electronics in your store and you decide to add espresso machines to your offering. You don't have any other coffee related items, so you place this espresso machine between a microwave and a blender. It's tagged at $150 and you were confident people would snatch it up. You pick the fancy red one. You think it looks great, but then it just sits there and sits there. After six months, no one has bought an espresso machine. What do you do? Before listening to this podcast, you probably would have figured you had two options. One, pull it from the shelves and give up on espresso machines because clearly no one's buying them, or two, discount the heck out of it. Mark it down until people start buying it to either get rid of the ones you already bought or fuel the market, which won't work. Both of those approaches are wrong. What you should do is get another espresso machine that looks as close to the one you already have, but double the size and twice the price and set it right next to the $150 one. Now when people come by, they will see two espresso machines and have something to compare. They might think, well, $300 is a lot to invest in an espresso machine, but this other one, so nice and compact and could fit on my counter. And oh, look at the color. That's only a few trips to Starbucks to make up the difference in price. Eventually I could upgrade to the bigger model if I want, but this is a nice introductory item and it's such a great deal. And boom. Espresso machine sold for bonus points. Did you notice how anchoring and adjustment snuck its way back in there? The $300 bigger espresso machine sets a high anchor to help the $150 price seem more affordable. These two concepts are like peanut butter and jelly. They're almost always going to work well together, which leads me to pricing in general. People ask me for my advice on pricing all the time. Seriously, all the time. And typically I recommend going with three options. There are two main philosophies or goal with this three pronged approach. The first is when you have one obviously best option. In that case, your three offers will include the best thing, something that is very similar to it, but obviously worse, and then an item that's completely different to add a little diversity. Let me show you how this works using a suggestion I made a couple weeks ago to Marielle during the On Air Strategy session episode, which was number 10 and again, that's linked in the podcast app in case you haven't had a chance to listen to it. One piece of advice I gave Marielle on that call was about the comparison of pairs of earrings. We were talking about little girls going with their moms to get their ears pierced and subsequently their first pair of earrings. In the questioning process, I encouraged her to find out if the girl had a favorite color or was interested in a birthstone of any kind. This gives a baseline to find items to compare against each other when they come in to pick out earrings. So you're prepared, you know what they want, and you're able to set this up perfectly for them and for you. Let's say this girl was born in May and she wants emerald earrings. Instead of only showing her one pair, there should be more than one for comparison. Marielle let us all know her gemstone earrings start at $70, so I recommend having those and then another pair at a higher price point, say $95 that are more than double the size of those available for $70. This allows for a simple comparison point. You can see that the more expensive pair is more than double the size for only a little bit more money. It feels like a better value in this case, you are using relativity to showcase the $95 pair and she should include one additional pair that looks completely different to help them choose one of the birthstone pairs. That third pair of earrings should be at least the same price as the best pair, the $95 option, and ideally more expensive, perhaps $125 to work in the high anchor. I'm going to get into some more detail on this in future examples. So why should it be structured this way? Because when given three choices, most people will pick the middle price. Let's say you work in a furniture store and someone comes in looking for a dining table. If you show one for 5,000 then one for 3,500 and one for 2,500, most people will get the one for 3,500. And remember from last week, as I just said there, you want to start with the most expensive option and work your way down to set that high anchor. If you start at the bottom and work your way up, people will be more likely to choose that low option, the $2,500 table, instead of the one you are trying to sell to them, which is the 3$500 table. Restaurant menus also do this all the time and you don't need that $200 grilled cheese to accomplish this. Although I am confident that the high price of that grilled cheese sandwich and the notoriety around it allows the restaurant to bump up the price on all their other offerings because they still look affordable when related to the exorbitant style sandwich or their even more expensive vanilla sundae. For most restaurants, normal restaurants, not ones with $200 grilled cheese sandwiches, they almost always have one item that is considerably higher than everything else on the menu. Very likely could be a special to be a decoy and get you to buy the next most expensive thing. My friend Michael Barbera is host of the Click Suasion podcast and he really digs into the science of menus and restaurants on his episodes. So if you're interested in learning more about behavioral economics, brain science and menus, go check that out. There's a link for you in the show. Notes to Click Suasion as we move on to real estate, I'm going to read a little bit from Predictably Irrational by Dan Ariely because he really just sums this whole process up really nicely. Using Real Estate and Shopping for Homes okay, suppose you're shopping for a house in a new town. Your real estate agent guides you to three houses, all of which interest you. One of them is a contemporary and two are colonials all three cost about the same. They're all equally desirable. And the only difference is that one of the colonials, the decoy, needs a new roof and the owner has knocked a few thousand dollars off the price to cover the additional expense. So which do you choose? The chances are good that you will not choose the contemporary and you will not choose the colonial that needs the new roof, but you will choose the other colonial. Why? Here's the rationale, which is actually quite irrational. We like to make decisions based on comparisons. In the case of the three houses, we don't know much about the contemporary because we don't have another house to compare it with. So that house goes on the sidelines. But we do know that one of the colonials is better than the other one. That is, the colonial with the good roof is better than the one with the bad roof. Therefore, we will reason that it is better overall and go for the colonial with the good roof spurning the contemporary and the colonial that needs the new roof. Perhaps the colonial is better on quality, but the contemporary is better on beauty. Those are attributes our brains cannot easily compare. So if you include a decoy, in this case the worst colonial, which is similar but obviously worse, it helps bring a point of comparison. The funny thing is your brain will now determine that the better colonial is better than all other options and deem it as the superior choice without much additional evaluation. So, as the real estate agent, make sure you have all three choices like this to help make the best choice. The obvious best choice. Dan's book also has a fantastic example from the Economist, which I always include in my consumers are weird talk because it really helps show the value of relativity. I'm going to explain it for you here, but because there are a lot of numbers flying around, it can be best digested when you see it as well. For that reason, I've put a post up on the blog which shows the images and discusses the points there. When you're able to, go check it out@the brainybusiness.com and click on blog and there's also a link for you in the show notes. For now, I'm going to explain it to you. The ad was trying to sell subscriptions to the Economist and it had three options. Go figure. First was digital for $59, then print only for $125, and finally a bundle of print plus digital for the same $125. When presented with those three options, 16 chose digital only. No one chose the ridiculous print only option, and 84 people picked the bundle before I gave you the advice in this episode, you likely would have decided to remove that option. I mean, if no one's buying it, why offer it, right? Get some more white space in there. We don't need staff to be supporting this thing that nobody's going to get. But what happened when they took that out for a test? 68 chose digital only and only 32 chose the bundle. Remember, it was 84 last time. So you went down from 84 to 32 when you removed an option that no one had picked. Why would this happen? You removed the option no one wanted and all the other prices remained the same. So why did so many people shift from the bundle to the digital only option? It's because digital and print are not the same thing. They do not compare to one another. Making it so all you can compare on is price. You don't have a value for print, so your subconscious assumes it must be $66, the difference between the bundle price at $125 and the digital price at $59. And then you have your conscious brain go into effect and say you figure you'll save the money and a few trees, you can always upgrade later, blah blah blah. Your conscious has now logic to you into confirming the irrational decision your subconscious brain made. So when setting prices for your business, consider the decoy. What is your best offer and how are your other offerings making it look as as good good as possible? If you are a coach or a consultant, what are the packages you offer? A lot of people have one of each thing and they're all completely different from one another. Maybe even more different than print and digital. So what I advise to you is to pick one of your offerings if you are going to promote and showcase that. What are its best features? What's the benefit someone gets from it? Now create something with similar benefits and features, but a worse value. This thing's entire purpose in life is to make the best option shine. If your best option was going out to a bar, the second option would be its wing lady. She is only there to talk up the star of the show. Then you pick a completely different product. Think back to that real estate example or the jewelry to help with the overall evaluation. You want the customer to make one simple and easy decision and have one comparison point so their brain feels like it completed the due diligence to make a decision to buy. Remember, there's a free worksheet on the website thebrainybusiness.com 12 to help you build this out for your specific situation. So you might be thinking, what about the other times you would use three products? This is for when you do not have a singular best option you're trying to offer, but instead have a tier of packages available. These can either be things that work together or where someone would only pick one. Remember back to last week when I gave the two examples of service based business owners who let me know they had applied my tips from Anchoring and Adjustment and relativity to create $20,000 packages. In one case she had three products that all work together. Someone could buy one, two or all three. So she set up a bundle to create a deal if someone got them all. Suddenly her previous highest priced product package of $10,000, which she almost never sold, looked much more affordable and started flying out the door. In the other, slightly different scenario was the individual with three tiers for services where someone would only choose one level of support and they're picking which type of setup they want, how much they want over the year or six months or whatever it is. In that case, the third highest price option when she added it in was chosen right off the bat and it will be interesting to watch if that continues and becomes a trend or if it will actually continue to push the middle price option as time goes on. Regardless, the three product approach works because of this concept of relativity and you should try it in your business offerings to see how much lift you can get in your sales. Okay, one last example before I wrap this up. And this one is in a completely different realm. To show just how robust this concept can be, many of us exercise or diet from time to time. Maybe you count calories, but it's often difficult to compare calories burned with what we put in our mouths. When you do an hour long class or run a 5k, you feel like you've done a ton of work, you're sweating and the energy expended feels like you really earned the rest of the day and all the food you're going to eat. Am I right? A lot of people will then celebrate by eating a little extra or saying it's okay to have that snack because I ran today. Our brains relate the effort expended to run with the effort expended to snack. And for many, that valuation is way off. I remember once, many years ago, I logged my workout into a fitness tracker and I was feeling super proud of myself. I was on top of the world but like I totally killed it. Said I burned, you know, 300 calories or something and I thought yeah, I am awesome. Until I noticed in the app they had a little table that showed what my calories burned equaled out to and it was something like 1.2 cans of soda or half a Big Mac or 3/4 of a Snickers bar or something where I didn't actually really earn all of anything. And let me tell you, it did not make me want to celebrate with a food related treatment and it made the comparison of calories much more real. This was more relative. Now I understood how it worked out. One study by Johns Hopkins put this to good use by posting signs in convenience stores which read you have to run 50 minutes, 50 minutes to burn off the calories in one bottle of soda. Yikes. They were pleased to see that their efforts worked and teenagers consumption of sugary drinks reduced when those signs were out. So just know Relativity is Not All About Pricing Finding the right point of relativity can help and encourage healthier behavior, which is pretty awesome. Personally, I'm all about finding ways to use these brain powers for good, like helping people to make healthy drink choices or to encourage savings behaviors. Like the project I'm currently doing with a credit union in Portland. It's very rewarding to see subtle ways to help people make better choices, as in that soda example, and hopefully in my study as well.
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So what got your brain buzzing as you learned about relativity today? For me, I'm always struck by how powerful this concept is, especially when it comes to pricing. Our brains don't determine value in a vacuum. We look at what's around something to decide if it's worth it. From restaurant menus to jewelry displays to tech packages and subscription models, relativity is everywhere. When you guide the comparison point, you guide the decision. This is a concept I dig into deeply in my book the Truth About Pricing, and if you've read it, you probably remember some of the espresso machine and jewelry store examples from this episode. What you might not have realized is how much relativity plays into left digit bias as well, which we're going to dive into in that upcoming Choiceology crossover episode in number 525. It's all part of the same human tendency to evaluate price and value relatively, which is why the 499 strategy works so well and can be a good fit for value brands. Like a penny isn't always a penny relative to what we're looking at here, right? 4.99 feels way different than $5, which feels way different than $5.01, right? So those relative values feel much different than the item itself. Relativity can also be used for good, as you heard in some of the examples today. It helps people make better decisions, feel confident in their choices, and drive healthier behaviors. The key takeaway? You don't need to drastically change what you sell, you just consider what you're comparing it to. Strategic placement and anchoring go a long way, especially when you're thoughtful about why you're doing something and understanding that customer's journey. So what's one way you've used Relativity in your business? Or maybe a time it swayed your decision as a customer? Come share it with me on social media. You'll find me as the brainy biz pretty much everywhere and as Melina Palmer on LinkedIn. There are links in the show notes to make it easy, as well as links for my top related past episodes, books, ways to get in touch, and more. It's all waiting for you in the app you're listening to and@the brainybusiness.com 524. And just like that, episode 524 on relativity is complete. Join me Thursday for another brainy episode of the Brainy Business Podcast. It's a special crossover with Choiceology. It's going to be a lot of fun and you don't want to miss it. Until then, thanks again for listening and learning with me, and remember to be thoughtful.
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Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.