Have you ever noticed that people prefer to own something, rather than rent it even when it makes way more sense to rent than to own? There is a simple reason for this it and it has to do more with when you pay rather than how much you pay.
Did you know that paying for something is painful literally? fMRI studies have shown that when a person has to pay for something, the same regions of the brain that light up when a person experiences pain also light up when they are paying for something.
What if customer satisfaction can actually be increased simply by separating the pain of paying with consumption.
For example, consider the alternative of building/buying a vacation property compared to staying in a luxury hotel. The expenses associated with owning a vacation home are considered differently from using the same money to pay for a luxury vacation. The mortgage, taxes, and insurance (PITI) as well as ongoing operating expenses, such as utilities and maintenance on even a relatively inexpensive/modest vacation property will exceed $12k per year. Making $1k per month PITI and periodic operating expense payments on a vacation property separates the payments from the consumption. When you finally spend time at your vacation property it is considered free so satisfaction is high.
However, consider the alternative. For that same $12k per year, you could take several fabulous vacations, more if you booked your stays using Airbnb. In this latter example, shelling out $12k at the point of consumption would not make it feel like it was a free vacation and it would feel much more painful. Therefore, your satisfaction is tarnished by the pain of payment.
What if I told you that there were a few pricing hacks that can actually increase a customer’s satisfaction? Simply by separating consumption from the payment, you can increase satisfaction. As a consumer, you can prepay, pay at the time of consumptions, or pay after consumption.
Pre-payments are like getting a gift card or buying an all-inclusive vacation package. Since the buyer pays in advance, the buyer is separated from their money before they experience what they purchased. Anticipation mitigates some of the pain felt by paying up front, but at the point of consumption there is zero pain which increases customer satisfaction.
Payment at consumption is when you pay with cash at the point of consumption. While it has the benefit of instant gratification because payment is directly coupled with consumption, the pain of payment detracts from customer satisfaction.
Payments after consumption are where the customer uses a credit card to pay. The consumer gets instant gratification from the purchase and defers the pain until the credit card bill arrives. Therefore, customer satisfaction is increased since the pain of payment is detached from consumption.
In fact, payments after consumption have some added benefits. Credit cards aggregate many monthly expenses and make people only pay once for all their purchases. So, a $1,000 per month credit card bill is far less painful to pay than making ten individual $100 payments. Therefore, consumers are willing to spend more, provide bigger tips, and overall make more careless money buying decisions when using a credit card since the individual item’s amount is small in comparison to the total credit card bill and the payment made in the future. This makes the payment associated with consumption very vague.
How can you use your knowledge of separating payment from consumption to increase your customer’s satisfaction?
