Ever hear of LTO's? Probably not. Neither had I until I read an interesting article on Yahoo Finance today. LTO's are Limited Time Offers and can be an effective part of a restaurant chains marketing strategy. Take, for example, McDonald's Shamrock Shake (picture above) which not only looks appetizing but puts you in the St. Patricks day holiday spirit.
There are many more example's of successful LTO's. Just think about the McRib! These food items don’t hold permanent spots on the menu, but rather are part of the fast-food industry’s “limited time offer” strategy meant to lure customers in for here-today-gone-tomorrow offerings.
As a Wall Street Journal Article noted this month, using a change of season or holiday to come out with — and test — a new product is a marketing ploy, but one that’s often successful. According to Technomic, a food industry research firm, limited time offers increased 25% over the last five years among the 250 biggest chains, the Journal article noted.
This article got me curious as to why these strategies are so successful. I did some research and found a very interesting reason as to why they work so well. The effectiveness of the LTO has its roots in a behavioral economic theory called prospect theory. Prospect theory explains why traders sell immediately after seeing a small amount of profit, but choose to keep stocks that continue dropping.
The graph below illustrates the premise of prospect theory: people will feel a lot of pain when losing $50, but only a little joy when gaining the same $50. Why? Because people weigh the values of gains and losses differently.
That’s why prospect theory is an important concept to understand in the context of limited time offers. Purchasing product X is envisioned as providing little joy. But losing out on the opportunity to purchase product X is envisioned as causing a lot of pain.
When executed smoothly, limited time offers trigger the loss aversion effect in consumers’ minds. Knowing that limited time offers work isn’t enough. Marketers who understand the relationship between prospect theory, loss aversion and buyer’s remorse will execute limited time offers flawlessly.
Okay, I think I'm going to go get a Shamrock Shake now!