Consumption and Pricing

Consumption of the offering is important to retain customers and to generate positive word of mouth about satisfaction. Pricing methods must be adjusted accordingly.

If a customer pays regularly for the service he is using, he is steadily reminded of the cost, he is incurring and is more likely to use the service regularly. When a customer uses a service regularly, he is more likely to discover its benefits and continue using the service. In comparison, if a customer makes an one-time payment, he is enthusiastic in using the service in the beginning, but the interest may wade gradually. And since the customer does not receive the full benefits of the service, he is likely to discontinue using the service.

For example, if a customer pays membership fees for a health-club monthly, he is reminded of the cost of his membership every month. He will feel the need to get his money’s worth throughout the year and will workout more regularly. Since he is benefiting from the membership, he is likely to renew the membership.

Companies have not paid attention to the relationship between consumption and pricing policies. Companies believe that if customers do not feel the pain of making payments, they will be more liberal in buying  the product or the service and in turn ignores their price sensitivity. Therefore, they mask the cost to the customers by such methods as automatic payroll deductions, bundling specific costs into a single, all-inclusive fees, season tickets etc. But these practices reduce the likelihood of the customer using the product, and a customer who does not use the product is not likely to buy it again.

Following Guidelines would be Helpful:

To build a long-term relationship with customers, it is important that they consume the product that they have bought. The extent to which customers use’ paid-for products determines whether they will buy the product again or not. This phenomenon is more pronounced in businesses that sell subscription or membership. Members of health clubs who work out four times a week are more likely to go in for renewal their memberships than those who work out just once a week.

In software business, once customers begin using an application, they are more likely to buy its upgrade. In businesses like movie theaters, sports arenas and concert halls, a big part of the revenue comes from customer spending on· parking, food and drinks. So, if ticket holders do not attend these events, these high margin secondary sales are lost.

Finally, consumption is essential to any business that depends on customer satisfaction to generate repeat sales and positive word-of-mouth. For diverse products such as wine, apparel books and electronic gadgets, customers will not purchase again or spread positive word-of-mouth if they do not use the products.

Customers feel compelled to use products that they have paid for to avoid feeling that they have wasted their money. Most customers would use a less effective service or product more when they have paid a higher price, than use a more effective product or service that they have bought for a lower price.

Consumption is driven by perceived cost rather than the actual cost. A $10 cash transaction feels of a different magnitude than a $100 cash deal. But a $10 credit transaction feels similar to one for $100. Customers remember the cost of products better if they pay for them in cash instead of credit cards. They also feel more pressure to consume products paid for in cash than if paid for with a credit card. Season tickets, subscriptions and advance purchases also reduce the pressure of consumption.

Payments made near the time of consumption increases attention to a product’s cost. Thus, they are more likely to be consumed. But payments made either long before or after the actual purchase reduce the attention to product cost and decrease the likelihood of its being used. Immediacy of payment is critical for the consumption of a paid-for product.

Services where customers have an option of paying annually, biannually, quarterly and monthly, reveal this phenomenon remarkably. It is found that members who make a single annual payment use the service most frequently in the time period immediately following payments. But the frequency of usage goes down subsequently, and in the last few months they treat their membership as if it were for free.

Similarly for biannual and quarterly payments, use of the service is highest each time payment is made, only to decline steadily until the next payment. For monthly payments the use is more uniform as they are reminded of the cost more frequently.

Companies bundle prices to hide the cost of individual components. Price bundling influences consumption. It is easier to account for the cost of an individual product or item in an unbundled transaction as compared to a bundled transaction. The one-to-one relationship between price and benefits makes the cost of that product in an unbundled transaction obvious. This makes the customer feel guilty if he does not use the product.

In case of season tickets, the customer pays one bundled sum for a collection of individual events. This makes it difficult to allocate costs to any individual performance or game. This makes it less likely to be used. As the number of events or days included in a bundle increases, the chances of attendance in individual events goes down. By anticipating actual demand managers can run operations more efficiently. This can be done by looking at the mix of bundled and unbundled purchases or the ratio of current to advance purchases. A manager should expect more no­ show rates when there are more bundled or advance purchases.

References:

http://hbr.org/2002/09/pricing-and-the-psychology-of-consumption/ar/1

http://www.wright.edu/~tdung/Pricing_consumption.htm

Sonia Kukreja

I am a mother of a lovely kid, and an avid fan technology, computing and management related topics. I hold a degree in MBA from well known management college in India. After completing my post graduation I thought to start a website where I can share management related concepts with rest of the people.
Sonia Kukreja