Bottom Dollar Effect
You are on a long-anticipated 10 day vacation at the beach. You’ve budgeted precisely $800 for spending money. This is the money you will use to buy souvenirs, small gifts for your nieces and nephews, or a cute pair of flip flops. It’s the last day of vacation, and you have $20 left. You want to buy some salt water taffy. It costs $18 and you are surprised at how reluctant you are to hand over your last $20 bill. It hurts a lot more than the first $20 you spent on a goofy hat on your first day of vacation, which still left you with a lavish $780 left to burn.
With $800 waiting to be spent your emotional journey might look like this…. “Oh, look at this hat, it’s perfect for the beach, I can wear it all week. A great investment! And that pepto bismol pink is perfect - it matches my suit! Only $20! I’ve got to have it!”
But with only $20 left, that salt water taffy eats up a huge percentage of your remaining budgeted money. The emotional journey might look more like this… While looking disappointingly at the last $2 of your budget in your fist and a paper bag full of taffy in the other, you might say, “I just spent $18 on salt water taffy? Salt. Water. Taffy. Do I really even like salt water taffy? I just bought it because I’m at the beach. What was I thinking?!”
That, my friend, is the Bottom Dollar Effect.
Bottom Dollar Effect - What is it?
We like to have money in our pockets and our bank accounts. When we start to run low, every dollar spent brings heightened feelings of annoyance, fear, and lack of safety. We layer those feelings onto the products and services that we are purchasing with those last few dollars in our budget.
The pleasure of the new purchase is weighed against the loss we feel with the money used to purchase it. The loss of money feels much more intense when it is a larger percentage of what we have. When we are spending our “bottom dollar,” — the last dollar in our pocket — pain feels much more pronounced than pleasure.
The way our brain thinks about spending at those moments also involves interplay with emotional dynamics like “Mental Accounting” and the “Pain of Paying.”
Let’s go over Mental Accounting first. It is useful to know that people maintain mental “accounts” when considering or managing purchases or philanthropy:
Current income – paychecks and/or the money available in checking accounts.
Current assets – homes, investments, and other less liquid assets.
Future income – bonuses, retirement income, future pay raises, and future inheritance.
You may also keep mental accounts (or actual budgeted accounts) around certain expenditures — vacation, college fund, philanthropy, food, and entertainment. The point is that in order to manage our money, we tend to organize it into various buckets.
Then there is the Pain of Paying. This is the money-specific example of loss aversion. For humans — whether it’s your bottom dollar or not — it just plain hurts to part ways with our money. It’s an example of loss aversion. Ways to reduce that pain include paying with a credit card, setting up an autopay, monthly recurring donations, and making pledges that are paid off over time. All of these options separate the decision from the drain on resources, and lower the pain in the moment.
Bottom Dollar Effect in Marketing
Studies have shown that people are significantly more likely to make discretionary spending decisions on payday or shortly after. Marketing efforts that coincide with a known payday will pay off. The small town where I grew up had two major employers — a saw mill and a paper mill. So there were set paydays that a large percentage of families counted on. I don’t know if the grocery stores and restaurants calibrated what they offered based on that knowledge, but I will bet there was an uptick in spending activity that was noticeable.
People who work on Wall Street traditionally can count on a large bonus after the end of the year. Real Estate agents get busy helping folks purchase second homes and bigger apartments. Trophy cars and high-end watches are promoted at that time of the year to the lucky bonus receivers.
Another time to promote products to consumers might be when they receive tax refunds. That check from the IRS can feel like found money.
These factors play out in the opposite direction, too. At the end of the month, when people might be feeling their budget tighten, timing discounts can help inspire people to buy, even when they feel their money is limited.
Bottom Dollar Effect in Fundraising
Know your donors. What money cycles affect them? If it’s not payday, is it the ups and downs of the stock market? When the stock market goes south, even billionaires tighten their belts. If you know and understand the way the bottom dollar effect makes your donors think about their pockets and bank account, then you’ll have more information that will help you fulfill your nonprofit’s mission, and help your donors feel really good about their support — not annoyed, put upon, or fearful — and those emotions can rub off on your organization and mission.
Once you know your donor’s money cycles, you’ll know when your requests for charitable contributions might have a greater return.
Think about Donor Advised Funds (DAFs) as a “mental account” that will come into play while donors are feeling the pain of paying. If your donors have set these up, these are funds that are set up precisely for philanthropy and nothing else. Even when donors are feeling the bottom dollar hard, if they have a DAF, there is still an opportunity to give without the pain of paying.
Pledges can also be a way to encourage your donors to make a commitment to your mission, even if they are at a bottom dollar moment. If they know an inheritance, a bonus, or another windfall is coming in the future, they can make their commitment with a pledge, and make the payment once they are past their bottom dollar stage.
Ethical Considerations
Be in partnership with your donors at all times. If they are feeling a hesitation because of a bottom dollar moment, or experiencing pain of payment, this may not be a good time to try to close a gift. And it may leave a bad taste in the donor's mouth for years to come, and pressuring is never a good fundraising tactic.
Circle back to the mission and the reason why the organization exists, the community it serves, and the way it is changing the world.
Leave space for your donors. Money brings up all kinds of unexpected emotions. Be available and let them know that they can come back when they are ready to make an investment in your work.
