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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