59. Behavioral Economics Foundations: The Pain of Paying

Buying things isn’t all fun and games – and the process of paying for things can actually cause pain for many people. In fact, neuroeconomics has found that when scanning subjects’ brains in an fMRI machine while they are going through the process of buying things, there is activity in the insula, which is a pain center in the brain. In many ways, it is just like physical pain, and the emotional pain can be very real. It doesn’t impact everyone on every single purchase, and there are some times when it is more impactful, and some people it is more impactful for. In many cases in business, you want to do what you can to reduce the pain of a payment so people are more likely to go through with a purchase, but there are times when it is important to keep those pains in place…I will give examples of these and what to do when the pain can’t be reduced. In this episode, I will let you know how this concept works including twelve different conditions where it is most likely to occur, some unexpected mechanisms that can cause pain when you wouldn’t even realize it, and (of course) tips for how to use this concept to your benefit in any type of business.

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Show Notes:

[04:08] The process of paying for things can actually cause pain for many people.
[06:16] Context is incredibly important when it comes to the pain felt by making a payment.
[10:06] Paying and consuming have sort of a reciprocal relationship…because making a payment reduces the joy of consumption, but consumption reduces the pain of paying.
[11:48] The way you talk about the price impacts the pain felt in paying more than the amount. Everything that comes before the price matters much more than the price itself.
[12:42] The more a transaction is perceived as: fair, an investment, immediate, for the sake of another person, under one’s own control and has payment before consumption…the WEAKER the pain of paying.
[13:45] When the pain of paying is too much – so that people do not buy things that they need or want because it is too difficult to give up money…they are called tightwads. Those who spend too much, too easily and do not feel an appropriate amount of pain before or during the spending process…we call them spendthrifts.
[16:43] Tightwads and spendthrifts don’t change their ways even when their income fluctuates.
[19:45] Tightwads are most sensitive to framing adjustments, so that is where you can make a difference. Adding the word “small” before a fee, or framing the purchase as an investment made it so tightwads were more likely to buy and feel less pain in paying.
[22:25] When people feel good about themselves (as when purchasing a virtuous product) there is less pain felt and associated with the payment across the board.
[23:35] One of the big issues for spendthrifts is they do not account for or intuitively understand the opportunity cost in the moment when they are getting ready to buy or wanting to buy things.
[25:38] Everyone will feel some sort of pain when paying. It is your job to figure out what the buyer needs, what would benefit them the most, and then present it to them in a way that will have the least pain felt.
[27:27] Think about how people interpret what they are getting. Did they choose the circumstance or was it thrust upon them? If it was not their choice, are there some other areas where you can help them feel like they did make a choice?
[31:14] When the pain of paying isn’t felt as much, it doesn’t impact the experience.
[33:29] Loss aversion is a big contributing factor to having the meter running and the pain of paying.
[36:30] Sometimes, people are willing to pay money to reduce the pain of lost time and they enjoy the experience more because it was their choice.
[37:15] Consumption can reduce the pain felt by paying, but paying can reduce the joy felt during consumption. This is a concept called coupling.
[39:56] Think about yourself as a consumer and how you would feel if you got the bill for your product or service after the fact.
[40:43] Are there any points in your business where you could use coupons or tokens or chips or beads instead of cash?
[41:28] The biggest thing is to make sure that people feel they are really gaining something when they spend money, and that it is not just being thrown away.
[43:11] Classifying your product or service as a gift really helps overcome the pain.
[44:34] Reminder: the more a transaction is perceived as: fair, an investment, immediate, for the sake of another person, under one’s own control and has payment before consumption…the WEAKER the pain of paying.

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59. Behavioral Economics Foundations: The Pain of Paying

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