After all, they’re paying the same amount for the same benefits. Who is more likely to work out on a regular basis? And who is more likely to renew the membership the following year?Īlmost any theory of rational choice would say they are equally likely. Mary decides on a monthly payment plan-$50 a month. Bill decides on an annual payment plan-$600 at the time he signs up. Two friends, Mary and Bill, join the local health club and commit to one-year memberships. We find that managers rarely, if ever, think about consumption when they set prices-and that be a costly oversight.Ĭonsider this example. Ask that same executive how pricing policies affect consumption-the extent to which customers use products or services that they’ve paid for-and you’ll get a muted response at best. This promotes preventive care, reducing HMOs’ costs.Īsk any executive how pricing policies influence the demand for a product or service, and you’ll get a confident, well-reasoned reply. By itemizing individual services’ costs within a bundled fee, HMOs may prompt patients to consume paid-for benefits. Psychologically link payments to benefits.By staggering membership payments to spread use of their facilities over the year, health clubs could prevent overcrowding-increasing customer satisfaction. Stagger payments to smooth consumption.She could better manage costs by staffing according to expected actual, rather than paid, demand-or boost revenues by overselling events for which she expects many no-shows. A theater manager can expect more no-shows if the proportion of season ticket holders is high. To augment demand-centered pricing with consumption-focused tactics: With little sunk-cost pressure, people don’t use the tickets-reducing their likelihood of buying next season. Season tickets “hide” each ticket’s cost, unintentionally encouraging customers to view their tickets as free. Price bundling masks an individual product’s cost, reducing the likelihood of its consumption.At one theater, the no-show rate for credit-card customers was 10 times that for cash customers. When people pay with credit cards, they’re less likely to remember the cost-or consume the product. Customers’ perceptions of price determine their likelihood of consuming paid-for products.For example, two weeks after paying $300 to join a tennis club, a man develops painful tennis elbow-but keeps playing. Why? The sunk-cost effect: People abhor wasting non-recoverable investments. People tend to consume products if they’re aware of their price.Most magazines’ renewal rates are 60% or less. This is especially important for businesses selling subscriptions or memberships-where long-term profitability hinges on retention, because acquiring customers is so expensive. Customers can’t repurchase or praise products they never consume. Consumption matters to any business relying on customer satisfaction to generate positive word-of-mouth and repeat sales. Customers who use paid-for products tend to buy them again.Demand-centered pricing has merit-but executives who use it exclusively risk trading long-term customer retention for short-term sales. And members who frequently work out tend to renew.īut to stimulate initial demand, most companies mask their prices, through advance purchases, seasonal memberships, annual subscriptions, etc.

Every month, she’s reminded of the cost-so she works out more, to get her money’s worth. Who’s more likely to renew their membership? Mary. Bill pays $600 on enrolling Mary selects the $50-per-month plan. And the more they use it, the more likely they’ll buy it again.įor example, suppose that Mary and Bill join a health club. Why should you care if your customers actually use your products? Isn’t it enough that they buy them? Not if you want repeat business.Ĭonsider this counterintuitive impact of price on customer loyalty: When your customers are aware of your product’s cost, they’ll likely use the product-to feel they’ve gotten their money’s worth.

High transaction costs will tend to