Mini Episode 7 - Why do people pay $7 for toast at a cafe?

Lydia in Claremont wants to know why cafes can charge big bucks for a little bread.

Dan: 00:00 Welcome to Bad Decisions mini episode seven. I'm Dan Monheit, your host, and we are using this mini episode format while Mel is off with her young child to get to the end of the long list of weird and wonderful questions you've sent us about human behaviors.

Dan: 00:32 I guess maybe the questions aren't so weird and wonderful, so much as the behaviors are. Anyway, today's question is from Lydia. Lydia, what you got for us?

Lydia: 00:40 Hey Dan, it's Lydia from Claremont here. I've been back at the office for a little bit now, and this morning me and my workmate popped into the cafe a few doors down for a coffee. I was a little bit hungry too, so I wanted a bite. $7 for plain toast? A bit painful.

Dan: 00:56 I tell you what, $7 for toast in a cafe does feel very, very full-on. This is one of those things where even in the moment of ordering it, you kind of see the insanity of it, right? So some of the bad decisions we make, it's not till the days or weeks afterwards that we sort of reflect on it and we think, "What the hell did I do that for?" But this is one of those ones where as you are ordering it and you're looking at the menu and you see toast with condiments, $7, you're like, "I know that $7 is enough to buy the entire loaf of bread and pay for all of the electricity I need to toast all of it. This is just madness." But we go and do it anyway, right?

Dan: 01:32 When I think about the exceptionally long list of things that humans do that demonstrate that we are bat shit crazy, cafe toast has to be somewhere right up there near the top. Definitely top three, maybe even number one.

Dan: 01:45 If we want to get to the bottom of what's going on here, we need to look no further than the bias or the heuristic of mental accounting, which refers to our tendency to treat money differently, even though all money is basically the same. A 1984 study by behavioral economics legends, [inaudible 00:02:02], identified three factors that influence how we think, feel about and spend money.

Dan: 02:09 The first is where the money comes from. Really the key insight on this one is that money that's considered a windfall. So unanticipated money, money that comes from a win from a one-time bonus, from a tax return, from a government grant, from an envelope from Auntie June, right? That sort of money seems to be counted really differently as money that we just earn in our normal course of living and working, and as a result tends to be spent way more freely.

Dan: 02:35 I think if anybody here has had a great night on the blackjack tables and then gone and bought some ridiculous gear down at the casino, you know exactly me what this feels like. This is spending house money. You also know why there are so many jewelry stores at the casino.

Dan: 02:50 The second factor that influences how we regard money is the mental buckets that we tend to put things into. So again even though all money is basically the same, we tend to have these kind of separate areas that we put it in. So, we get our paycheck and we might decide that we're going to carve off $70 every week for our holiday fund, and $120 for groceries and $50 for our weekly petrol budget. So, we tend to do weird and irrational things to keep ourselves within those constraints of those buckets that we set up.

Dan: 03:20 The third factor sort of ties in a little bit to the second, and that is category limits that we seem to place on things. These really are kind of subjective arbitrary numbers that we decide is an acceptable price to pay for anything from a car to a shirt, to shot a vodka out at a nightclub.

Dan: 03:41 It's weird when you catch yourself in the middle of one of these category limits being breached. So, you might be shopping online and you see some wonderful bedsheets that cost $240 and they come with free shipping and you think, "That is perfect, I'm going to order those. They're going to be great." At the same time, you might see the identical bedsheets for $190, but you need to pay $50 for shipping, right? Same $240, and think, "That is outrageous. I'm not paying $50 for shipping, shipping's meant to be free," right? Now logical, rational people would realize that the $240 to get the bedsheets to you is the same, but these category limits cause us to consider those two options very, very differently.

Dan: 04:16 So it is behind here, door number three, that we really find the answer to our cafe toast conundrum, and that while $7 feels like a lot in the slice of toasted bread at home category, $7 by comparison is a small price to pay for the fun or the luxury of enjoying a cafe breakfast with family and friends.

Dan: 04:37 So for brands, really the key takeaways here are to, number one, if you can look for windfall spenders, right? Look for people who are spending money that they otherwise weren't planning to get. So this might be ramping up your advertising around tax return time, setting yourself up at a casino, or maybe trolling the newspaper to find recent inheritees of giant sums of wealth.

Dan: 04:59 If that is not possible or practical for you, the other thing you can think about is what is the category that you are finding yourself in, and how might you be able to stretch or break that to get people to think differently about the right price to pay for what you're selling? Because at the end of the day, who wants to be selling $3 loaves of bread when $7 slices are all the rage?

Dan: 05:18. So Lydia, I hope that answers your question on why cafes are charging, and probably better, why people are paying $7 for a slice of toast. If you have got any other weird and wonderful questions about the things that we do, please send them through to me at askdan@hardhat.com.au, or you can find me all over the internet at Dan Monheit. See you for the next installment in a couple of weeks. Peace out.