Payment Methods and Product Perception
I recently ran across an interesting article in the Journal of Consumer Research. In it, the researchers looked at the effect of your payment methods (credit card vs. cash) on how you evaluate a product (benefits vs. costs).
The authors argue that the so-called “credit card premium” — i.e., the fact that using a credit card increases the average consumer’s propensity to spend — is due in part to the effect that using credit has on your perception/evaluation of products.
They found, for example, that study participants “primed” with a credit card (i.e., given word puzzles that involved terms related to credit cards) were less able to recall details related to product costs than those that were primed with cash. And yet, the credit card priming had no effect on the ability to recall product benefits.
Likewise, individuals primed with a credit card tended to identify more words related to the benefits of a product as opposed to costs when they did a computerized word recognition study. Those primed with cash did the opposite.
In a third study, individuals primed with credit cards were found to respond more quickly to benefits than to costs when given a product description and asked to press one button if they heard a benefit, and another button if they heard a cost. Cash-primed individuals were the opposite.
And finally… They found that consumers will preferentially select a product with superior benefits when primed with credit concepts, but a product that is superior cost-wise when primed with cash concepts.
In other words, it seems that dealing with cash (or at least cash concepts) makes you more price sensitive, whereas dealing with credit (or at least credit concepts) make you more sensitive to perceived quality.
In terms of big picture implications, they argued that:
Marketers, by constantly reinforcing the salience of credit-related concepts, may be affecting not just the amount of money consumers are willing to spend but also the nature of the goods and services that ?nd their way into consumers’ market baskets.
and that such effects could even have health consequences:
Paying with credit cards may increase the likelihood of indulgent choices that are less healthy compared to cash. This effect is likely to be magni?ed by the rapid movement away from cash to credit/debit card purchasing.
Food for thought…
Source: Journal of Consumer Research
Modified on February 25th, 2012 - 10 Comments
Filed under: Credit Cards
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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February 24th, 2012 at 6:55 am
So true! I think when we’re paying with credit card, we don’t tend to THINK about the fact that it’s money. Not the same way we would if we were holding a handful of bills.
February 24th, 2012 at 10:16 am
While this is probably true for the population as a whole, those with basic numeracy and budgetary skills can in effect get a free ride using credit cards at the expense of those who don’t. Monthly 1+% back, all sorts of sign-up bonuses, sheer convenience, price protection, fraud protection, etc etc. Credit cards are great for those who can use them intelligently, all subsidized by those who can’t.
February 24th, 2012 at 12:43 pm
That last implication is quite a stretch though. Couldn’t you argue the opposite – that credit card payers are likely to choose products with more health benefits (organic food vs. junk, gourmet vs. fast food, etc)
February 24th, 2012 at 2:26 pm
Numerous studies have shown that you tend to spend more with credit cards vs. cash. Anyone that is living paycheck to paycheck should not be using credit cards!
I agree with Long Term Returns in that you can definitely use cc’s to your advantage. I mainly use cc’s for the sign up bonuses though, not so much the cash back. Pennies compared to what you can get…
February 24th, 2012 at 4:49 pm
Long Term Returns makes a good point about how intelligent credit card users actually benefit from credit card usage. Personally I find that I am much more likely to spend cash in my wallet. When I have to use my credit card, there is the extra process required which makes me think twice. I wonder if these tests have anything to do with the fact that most bigger purchases are not practical to pay for with cash.
February 24th, 2012 at 7:43 pm
I think its funny to hear otherwise intelligent people say things like “I know that’s what ’science’ says, but it doesn’t apply to me. I’m too smart for that.”
February 25th, 2012 at 1:26 am
Thanks for sharing this research!
As we work on our $25,000 debt snowball, we have switched to only using cash for spending money. It has really made us more conscious of prices and our shopping choices.
February 26th, 2012 at 1:20 pm
Many people are easily lured into spending more money on credit but that certainly does not mean that credit cards will ‘make’ any individual spend more money.
If you take a large group of people and study them then they are likely to exhibit some pretty bad financial habits on average. A casual survey of American household finances should be evidence that we as a nation make a lot of poor choices. But this does NOT mean that everyone is subject to those bad financial habits. I’m sure all the scientific studies show that a minority of individual studied did NOT spend more simply because they used a bit of plastic instead of a bit of paper.
February 26th, 2012 at 9:56 pm
Des, that’s not necessarily false. Dan Ariely, who has written a lot about behavioral economics, noted that when you are aware of these previously unconscious behaviors, you become a lot more likely to avoid them (if desired).
February 27th, 2012 at 7:58 am
I remember reading that McDonald’s was hesistant to accept credit cards years ago because of the processing fees, but noticed that people ordered more food per order than they would have otherwise if they used cash. This is probably the reason most places have migrated to credit card acceptance.