High-income shoppers buy private label groceries while booking luxury vacations without hesitation. It looks like a contradiction, but the same psychological decision-making drives both choices, and retailers need to understand it to succeed.

"People are inconsistent. We can be a different person when we make different purchases," said Professor Ayelet Fishbach from the University of Chicago's Booth School of Business on a recent episode of “Reimagining Retail.”

The phenomenon, recently dubbed "the frugal rich" by the Wall Street Journal, describes higher-income consumers who happily purchase discount groceries but don't think twice about splurging on experiences. Rather than asking whether consumers are becoming more frugal or indulgent, the real question is: How do consumers decide what's worth paying for?

Uncertainty drives contradictory spending behavior

Economic uncertainty over the past several years, from COVID-19 to inflation to AI disruption, has fundamentally changed how consumers approach purchases. But uncertainty doesn't lead to predictable behavior.

"Uncertainty makes us nervous as consumers," Fishbach said. "That could lead to less purchasing and maybe try to save more because you don't know what the future will bring. However, fears of inflation lead people to stock up."

The concept of "learned helplessness" particularly affects younger consumers who started their financial adult lives during COVID. Many feel they'll never afford major milestones like homeownership, leading to a "might as well enjoy life now" mentality that prioritizes experiences over long-term savings.

Retailers can't assume economic uncertainty will uniformly reduce spending. Some consumers respond by seeking deals and saving; others splurge on immediate gratification. Understanding which products trigger which response is critical.

Mental math leads to irrational optimization

Consumers often spend disproportionate time and energy on small purchases while making snap decisions on large ones, a behavior driven by predictable cognitive biases.

"We often give each purchase the same amount of cognitive work," Fishbach explained. "I'm going to spend 15 minutes thinking about each purchase, whether it's a toothbrush or a flight ticket."

Another bias: Consumers think in percentages rather than absolute dollars. A 40% discount feels significant whether it saves $2 or $200, leading shoppers to feel accomplished about minimal savings while overlooking opportunities for substantial ones.

During Amazon Prime Day, this psychology plays out at scale. Shoppers hunt for deals on low-cost items like shampoo, celebrating percentage discounts without considering the actual dollar savings.

Retailers should emphasize percentage discounts on lower-priced items to drive purchase behavior, while recognizing that consumers may not apply the same scrutiny to higher-ticket items where margins are better.

Experiences bypass self-control mechanisms

Premium credit card companies have capitalized on consumers' willingness to spend on experiences by offering exclusive access to events and travel.

American Express provides cardholders with unique experiences at venues like the US Open and NFL Draft, while Chase partnered with the World Cup. When the HBO series "White Lotus" gained popularity, Amex offered exclusive trips to filming locations.

"Experiences are exactly that kind of thing that doesn't set our self-control alarm off," Fishbach said. "It's not a repeated consumption. I don't plan to go to this White Lotus hotel every month or every year."

The exclusivity factor amplifies spending. When experiences are positioned as once-in-a-lifetime or available only to select cardholders, consumers justify higher spending because they "can't miss out."

Brands should emphasize scarcity and exclusivity when marketing experiences. Unlike material goods that trigger price comparison, experiences are evaluated in isolation, allowing for premium pricing.

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We prepared this article with the assistance of generative AI tools and stand behind its accuracy, quality, and originality.