What is House-money effect?
It is one of the most powerful tools used in marketing.
Let me narrate the concept through a story.
Consider you have worked very hard the whole year & saved USD 12000 at the end of the year. What would you do if given the option to use this money?
- Deposit in a bank account
- Invest it
- Fulfill your desire i.e. buy phones, gadgets, cars, etc.
- Buy a ticket to a luxury cruise.
Most of us would choose option (a), (b), or (c)
Now, in The second scenario, if you win a lottery of USD 12000 where would you choose to spend your money?
Most of us would choose options (c) and (d).
Researchers coined this behavior as the “House-money effect”
We tend to be more frivolous with lottery or inherited money rather than with hard-earned money.
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How does “house-money” used in Marketing?
Marketers use this phenomenon to their advantage.
Ask me how?
Have you noticed credit card companies giving you a preloaded card of USD 100 for your initial purchase or your telecom operator providing you the first month free when you subscribe to their data plans for the year?
In India Jio telecom used by giving the first 6 to 9 months of free data and calls in their spree to acquire customers.
All the above examples get you on the temptation hook and make you habitual with the product or services thus driving the usage.
That’s why I always say,
“Business is all about understanding human psychology and behavior; If you don’t understand customers, you don’t have a business”.
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(The Header picture is clicked at a new retail incubator store that I have co-founded, giving a retail platform to beauty brands willing to enter the middle east market. At Adhara we build retail as a more collaborative platform. Visit us at Wafi Mall, ground level near Carrefour, Dubai)
About the author:
Ritesh Mohan is a passionate retail professional with over 22 years in the Retail sector, handling some of the biggest brands in the beauty, fashion, and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well as in the Middle East region. Ritesh specializes in Retail management, Product development, Brand Management, Retail Operations, Sales Management, and Franchising & Business Management. He strongly believes in empowering business owners with his wisdom & experience of around two decades in the industry