Framing, loss aversion, transaction utility, and reusable coffee cups

This article in The Conversation yesterday, by Sukhbir Sandhu, Robert Crocker, and Sumit Lodhia (all University of South Australia) caught my attention, because it nicely illustrates some of the concepts from behavioural economics that I discussed with my ECONS102 class last week:

Many cafe owners offer discounts ranging from 10c - A$1 to customers who bring in their own reusable cups.

But our findings reveal these discounts are ineffective in changing consumer behaviour.

A cafe owner we interviewed described how, despite providing a 20c discount for reusable cups, she didn’t think saving money motivated her customers:

The regulars were people who’d happily drop in a dollar tip into the jar kept on the counter. They were therefore not that concerned about 20c discount.

We know from previous behavioural psychology literature consumers are more likely to be what’s called “loss averse” as opposed to “gain seekers”. In other words, people hate paying extra for takeaway coffee cups more than they like getting a discount for bringing their reusable cups.

So, if you own a cafe, focus on making consumers pay extra for choosing takeaway coffee cups rather than offering discounts for reusable cup use. It’s more likely to motivate customers.

Let's say that a cafe owner wants to encourage customers to use reusable cups. They might do this because of concern for the environmental effects of disposable coffee cups, or the cafe owner might simply recognise that disposable cups cost them money, and so offering to fill a customer's own cup must be slightly more profitable for the cafe owner, because then they don't incur the cost of providing a cup.

Putting aside any cost differences, cafe owners could discourage their customers from disposable cups by making coffee sold in disposable cups more expensive. We know that when something is more costly, rational consumers will buy less of it. This also makes coffee in reusable cups relatively cheaper, and so would encourage some consumers to switch. Let's consider two different framings of the price difference: (1) consumers who use a reusable cup receive a 20 cent discount; or (2) consumers who use a disposable cup have to pay an extra 20 cents. 

How many consumers would switch? If consumers were purely rational, it wouldn't matter how the price difference was framed. A 20-cent discount for using a reusable cup and paying 20 cents extra for a disposable cup are exactly the same (provided the prices are the same in each case). Both options would lead to the same number of customers switching to a reusable cup.

Now here's where some behavioural economics comes in. Consumers (like every decision-maker) are not purely rational, they are quasi-rational - they are affected by cognitive biases and use heuristics when making decisions. Framing makes a difference to quasi-rational consumers, but it's not clear which framing should make consumers use fewer disposable cups.

One of the cognitive biases that quasi-rational decision-makers are affected by is loss aversion - decision-makers dislike losses much more than they like equivalent gains. In this case, the loss in utility (or satisfaction, or happiness) for the consumer from paying 20 cents extra for a disposable cup, is 'worth' much more than the gain in utility (or satisfaction, or happiness) for the consumer who receives a 20-cent discount for using a reusable cup. So, we would expect the 'loss framing' (20 cents extra) to have a much bigger effect on consumer behaviour than the 'gain framing' (20-cent discount). 

However, another cognitive bias that affects consumers is transaction utility, which I have blogged about before. Transaction utility recognises that consumers not only receive utility from the good or service that they purchase, but also from the act of purchasing. If a consumer feels that they are 'getting a good deal', this makes them happier (higher utility), and makes them more likely to purchase. So, based on transaction utility, we would expect the 'gain framing' (20-cent discount) to have a bigger effect on consumer behaviour than the 'loss framing' (20 cents extra).

Given that Sandhu et al. found that the negative framing had a bigger effect overall, it appears that the loss aversion effect is larger than the transaction utility effect. It would be good to see more research on this though, that disentangles those two effects more.

Overall, the takeaway message from this research is that if you, as a seller, want to steer consumers away from something using a price difference, present it as involving a loss to them (they have to pay extra). On the other hand, if you want to steer consumers towards something using a price difference, present the alternative as involving a loss to them. At least until this has been investigated a bit more, it appears that paying extra is a more powerful motivator for changing consumer behaviour than a discount.