Readers, today I want to share an unsettling insight into consumer psychology, using an experiment described in Daniel Kahneman's striking book Thinking, Fast and Slow.
Edit: see the follow up to this post: The Taboo Tradeoff
The question below is adapted from a study of the rationality of consumer valuations of health risks, which was published by a team of economists in the 1980s. The survey was addressed to parents of small children.
Suppose that you currently use an insect spray that costs you $10 per bottle and it results in 15 inhalation poisonings and 15 child poisonings for every 10,000 bottles of insect spray that are used.
You learn of a more expensive insecticide that reduces each of the risks to 5 for every 10,000 bottles. How much would you be willing to pay for it?
The parents were willing to pay an additional $2.38, on average, to reduce the risks by two-thirds from 15 per 10,000 bottles to 5. They were willing to pay $8.09, more than three times as much, to eliminate it completely. ...This premium is compatible with the psychology of worry, but not with the rational model [of decision-making].
So: it's clear that we humans will gladly overpay for vanishingly small increments of perceived safety, in total defiance of both math and probability. With that in mind, a question for readers:
Do you think the companies that sell to us are aware of this? Is it likely they price "safer" products accordingly, thereby (essentially) profiting from our worry?
Duh, of course. Yes, yes, and yes. Here are some consumer products categories where we can see this exact phenomenon:
"All natural" food products
"No added nitrites" meats
DEET-free mosquito repellent
Bisphenol-a free canned foods
Do you expect these products to carry premium prices, typically? Yes, in all of them. But more importantly, are the price premiums commensurate with the increased costs to the producer or retailer? In other words, is the producer charging more because the "safer" product actually costs more to make, or are they charging more simply because they can?
Admittedly, we don't know all the direct costs in each of the examples above. But we do know, for example, that grocers make significantly more profit on organic foods. Also, thanks to the enormous economies of scale in the modern-day chemical industry, the cost of the chemicals in a DEET-free insect spray is likely to be very close to the cost of the raw materials in DEET-based spray. The cost of the plasticized liner inside a can of food is an irrelevancy compared to the value of the actual food in that can. Finally, it's quite likely that production costs for "no-added nitrites" meats are actually less then "nitrite-added" meats. You just have to think about it for a minute to see why.
So if the costs are the same, yet we see 30%, 50% and 100% price premiums for these products, let's be honest and call it like we see it: these products are obviously aspirational, and they're priced and marketed that way by design.
So, consider the following question as an empowered consumer: What value do you really get by paying substantially more for a label or sticker that may make you feeeeeel safer, but in reality offers you, at best, an imperceptible increase in safety?
Asked a slightly different way: how much extra will a disempowered consumer pay for the "feeling" of safety?
The consumer products industry already knows the answer to this question. Do you?
Read Next: Divorce Yourself from the False Reality of Your Grocery Store
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