The denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations
To a rational shopper, the possession of £20 translates exactly to the ability to buy £20 worth of goods. The form of the £20 should not matter—whether it is one £20 bill, two £10s, four £5s, twenty £1s, or any configuration of change, the purchasing power is the same.
However, shoppers are rarely perfectly rational, and this case is no exception. In the event that a person is given £20, that person is more likely to spend it if it is given in smaller denominations (for example, £1 bills or change) than if it is given in larger denominations (especially in the case of one £20 bill). This is known as the denomination effect.
As a retailer, think about this for a minute, when a shopper takes money from and ATM outside the supermarket, the denomination of the notes dispensed will alter their spending propensity. And brands, shoppers appear to disproportionately value larger denomination notes. Something to consider in promotions, competitions and giveaways.
When it comes to applying this bias in-store, there are several considerations.
- Give change in larger denominations – Shoppers will feel they are getting more change if you give them a £20 note in preference to 4 X £5 notes.
- Smaller denominations please – If you have and ATM or a post office in-store, have them dispense smaller denomination notes so that shoppers are more likely to then spend them.
- Conversion rate - If you have a low browser to purchase conversion rate, find ways to get shoppers to make a small initial purchase, then they will have mentally ‘split a £20’ and bed more likely to continue spending.
Cognitive biases are powerful things and even the change given to shoppers can alter their perception of the in-store experience and brands purchased.