The Denomination Effect: Banknotes vs. Coins

The denom­in­a­tion effect is the phe­nomen­on whereby people spend coins faster than bank­notes: it shows that we are more will­ing (there are few­er psy­cho­lo­gic­al bar­ri­ers) to spend the same sum of money in coins than in ‘bills’.

It’s obvi­ous, but I like hav­ing these things ‘con­firmed’ and hav­ing a name to go with them.

Anoth­er exper­i­ment involved [NYU and Berke­ley Pro­fess­or of Mar­ket­ing Priya Raghubir] stand­ing out­side a gas sta­tion in Omaha. She would have people fill in a sur­vey about gas usage and then thanked them with either a $5 bill, five $1 bills or five $1 coins. People went into the store, and when they came out Raghu­bir asked them for their receipts. The ones with coins spent the most, people with dol­lar bills a little less. And people with one $5 bill kept that one in their pock­ets.

Raghu­bir wanted to see wheth­er that effect was par­tic­u­lar to Amer­ic­an cul­ture, so they ran the exper­i­ment over­seas. Giv­en a week’s salary in dif­fer­ent denom­in­a­tions, house­wives in China behaved the same way.

The art­icle sug­gests that there may be a way to exploit this in order to “get con­sumers going again”–I won­der how this can be exploited online?

2 thoughts on “The Denomination Effect: Banknotes vs. Coins

  1. Simon Bostock

    I think they already do – the denom­in­a­tion effect also applies to cred­it card trans­ac­tions with people being much much more will­ing to spend when it’s on a card.

    And then ‘vir­tu­al cur­rency’ is yet anoth­er level of abstrac­tion. The great­er the level of abstrac­tion, the more ready we are to spend?

  2. Lloyd Morgan Post author

    That’s a nice idea: increas­ing levels of abstrac­tion to lower the bar­ri­ers to spend­ing.

    I expect there to be an upper lim­it to this, how­ever (in both levels of abstrac­tion and amount spent).

    Would abstrac­tion and micro-pay­ments work more? How about delay­ing the actu­al pay­ment by, say, adding an extra charge to a monthly billing cycle rather than tak­ing imme­di­ate pay­ment for a one-off pur­chase (if they sub­scribe to a ser­vice)?

    Buy-now, pay-later: only 15 Bostock Dol­lars ($1 BD = $0.10 US, bought in bulk in advance)?

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