Paying with Money or with Effort: Pricing When Customers Anticipate Hassle
68 Pages Posted: 8 Apr 2011 Last revised: 17 Jun 2011
Date Written: April 7, 2011
For many services, customers subscribe to long-term contracts. Standard economic theory suggests that customers evaluate a contract as the sum of benefits and payments. We suggest that rather than evaluating multi-period service contracts at the contract-level, customers use period level bracketing. They evaluate the distinct per-period loss or gain they incur from choosing this contract. This has important consequences when benefits vary over the course of the contract, for example due to "hassle costs." If customers use period-level bracketing, they will value a lower price more in periods where they have hassle than in other periods. We explore this using data from a field experiment for web hosting services. The field experiment had 2 hassle cost priming conditions (present, absent) x 2 discount conditions (offered, not offered). We find that a lower price in the initial period is more attractive to customers when they expect their hassle costs to be high at setup. In six lab experiments, we support and extend the field experiment’s findings. We find evidence for period-level bracketing when customers have hassle costs, independently of whether hassle costs occur in the first, an intermediate or the last period of a contract. We rule out alternative explanations, such as hyperbolic discounting. Our findings suggest that in setting prices, firms should consider the timing of hassle costs faced by customers.
Keywords: Pricing, Service Contracts
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