Pricing and the Psychology of Consumption

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.

Consider 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. And the more they use it, the more likely they’ll buy it again.

For example, suppose that Mary and Bill join a health club. Bill pays $600 on enrolling; Mary selects the $50-per-month plan. Who’s more likely to renew their membership? Mary. Every month, she’s reminded of the cost—so she works out more, to get her money’s worth. And members who frequently work out tend to renew.

But to stimulate initial demand, most companies mask their prices, through advance purchases, seasonal memberships, annual subscriptions, etc. Demand-centered pricing has merit—but executives who use it exclusively risk trading long-term customer retention for short-term sales.

The Idea in Practice

Here’s how pricing and consumption work:

• Customers who use paid-for products tend to buy them again. Consumption matters to any business relying on customer satisfaction to generate positive word-of-mouth and repeat sales. Customers can’t repurchase or praise products they never consume.

This is especially important for businesses selling subscriptions or memberships—where long-term profitability hinges on retention, because acquiring customers is so expensive. But keeping them is tough. Most magazines’ renewal rates are 60% or less.

• People tend to consume products if they’re aware of their price. Why? The sunk-cost effect: People abhor wasting non-recoverable investments. For example, two weeks after paying $300 to join a tennis club, a man develops painful tennis elbow—but keeps playing.

• Customers’ perceptions of price determine their likelihood of consuming paid-for products. When people pay with credit cards, they’re less likely to remember the cost—or consume the product. At one theater, the no-show rate for credit-card customers was 10 times that for cash customers.

• Price bundling masks an individual product’s cost, reducing the likelihood of its consumption. Season tickets “hide” each ticket’s cost, unintentionally encouraging customers to view their tickets as free. With little sunk-cost pressure, people don’t use the tickets—reducing their likelihood of buying next season.

To augment demand-centered pricing with consumption-focused tactics:

• Practice yield management. A theater manager can expect more no-shows if the proportion of season ticket holders is high. 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.

• Stagger payments to smooth consumption. By staggering membership payments to spread use of their facilities over the year, health clubs could prevent overcrowding—increasing customer satisfaction.

• Psychologically link payments to benefits. By itemizing individual services’ costs within a bundled fee, HMOs may prompt patients to consume paid-for benefits. This promotes preventive care, reducing HMOs’ costs.