Consumer use of mental accounting


Researchers have found that consumers use mental accounting when they handle their money. Mental accounting refers to the manner by which consumers code, categorize, and evaluate financial outcomes of choices. Formally, it has been defined in terms of “ The tendency to categorize funds or items of value even though there is no logical basis for the categorization e.g. individuals often segregate their savings into separate accounts to meet different goals even though funds from any of the accounts can be applied to any of the goals.

For example, assume you spend $50 to buy a ticket to see a concert. As you arrive at the show, you realize you’ve lost your ticket. You may be unsure about purchasing another ticket for $50. Assume, on the other hand, that you realized you had lost $50 on the way to buy the ticket. You might be much more likely to go ahead and buy the ticket anyway. Although the amount lost in each case was the same $50 — the reactions were very different. In the first case, you may have mentally allocated $50 for going to a concert. Buying another ticket would therefore exceed your mental concert budget. In the second case, the money that was lost did not belong to any account, so the mental concert budget had not yet been exceeded.

Mental accounting is based on a set of key core principles:

Consumers tend to segregate gains. When a seller has a product with more than one positive dimension, it is desirable to have each dimension evaluated separately. Listing multiple benefits of a large industrial product, for example, can make the sum of the parts seem greater than the whole.

Consumers tend to integrate losses: Marketers have a distinct advantage in selling something if its cost can be added to another large purchase. House buyers are more inclined to view additional expenditure favorably given the high price of buying a house.

Consumers tend to integrate smaller losses with larger gains. The “cancellation� principle might explain why withholding taxes taken from monthly paychecks one may feel less aversion than large, lump sum tax payments – they are more likely to be absorbed by the larger pay amount.

Consumers tend to segregate small gains from large losses. The “silver lining� principle might explain the popularity of rebates on big-ticket purchases such as care.

The principles of mental accounting are derived in part from prospect theory. Prospect theory maintains that consumers frame decision alternatives in terms of gains and losses according to a value function. Consumers are generally loss averse. They tend to overweight very low probabilities and underweight very high probabilities.

Trying to understand the customer’s behavior in connection with a product has been called mapping the customer’s consumption system, customer activity cycle, or customer scenario. This can be done for such activity clusters as doing laundry, preparing for a wedding or buying a car. Buying a car, for example, involves a whole cluster of activities, including choosing the car, financing the purchase, buying insurance, buying accessories, and so on.

Profiling the Customer Buying Decision Process

How can marketers learn about the stages in the buying process for their product? They can think about how they themselves would act (introspective method). They can interview a small number of recent purchasers, asking them to recall the events leading to their purchase (retrospective method). They can locate consumers who plan to buy the product and ask them to think out loud about going through the buying process (prospective method); or they can ask consumers to describe the ideal way to buy the product (prescriptive method). Each method yields a picture of the steps in the process.