The Why #7: “Why do people pay $7 for toast at a cafe?”

By Dan Monheit, 23.10.20

Question submitted by Lydia, Claremont

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Yup. It’s outrageous. $7 for one slice, two if you’re lucky. And even in the moment of ordering it, you know full well that the same $7 could buy you the entire loaf, plus the electricity required to toast it all.

If I’m ever summoned to court to prove that the way humans make decisions is emotional, irrational and illogical, cafe toast will surely be my Exhibit A.

Yes, I could tell a similar story with $14 vodka shots or $22 buckets of popcorn, but there’s something about the ubiquity of $7 cafe toast that makes it undeniable.

Why, oh why?

Mental Accounting

What we’re looking at here is Mental Accounting, a bias that refers to our tendency to treat money differently, even though objectively, it’s all the same.

A 1984 study by Kahneman and Tversky identified the three factors that influence the subjective value we place on our cash. These are:

  1. Where it comes from. Unexpected ‘windfall’ money — be it a one off bonus, a tax return, a government grant or a gift from Aunty June — is spent more liberally than money we earn through our regular jobs.
  2. What it’s for. We tend to put money into separate mental folders; $70 for the holiday fund, $130 for groceries, $200 for a rainy day. Strangely, we do this even if the money we set aside for ‘saving’ ends up costing us, because of the interest we’re racking up on a credit card that we’ve chosen to not pay down.
  3. Category limits. Subconsciously, we place arbitrary thresholds on what we’ll spend on certain things. $240 bed sheets with free shipping? Let’s do it. $190 bed sheets plus $50 postage? You’ve got to be kidding!

And it’s behind door number three that we find our solution to the overpriced cafe toast conundrum. Whilst $7 is likely to be a huge breach of our ‘slice of bread at home’ category threshold, it’s a small price to pay to keep the good times rolling at a trendy cafe with friends.

Same item. Different category. Different limit.

One takeaway for brands, is to look for audiences spending windfall (rather than hard earned) money (hello punters, EOFY bonus recipients and recent inheritees).

Beyond this, it pays to consider which category you’re placing yourself in, and the associated pricing limits in the minds of consumers. After all, who wants to be selling $3 loaves when $7 slices are all the rage?

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Behaviourally Yours,

Dan Monheit

PS If you missed last week’s, you can still find out why you get so many notifications about the status of your parcel here.

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Bad Decisions Podcast
Learn more about Mental Accounting and how brands can use it on episode 13 of the Bad Decisions Podcast.

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Want more?
Check out Dan’s short write up in Commercial Real Estate on how bricks-and-mortar stores are driving online sales.

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