Advance Payment Systems: Paying Too Much Today and Being Satisfied Tomorrow

International Journal of Research in Marketing, 32 (3), 2015 Forthcoming

Rotman School of Management Working Paper No. 2575159

62 Pages Posted: 9 Mar 2015

See all articles by Fabian Schulz

Fabian Schulz

Goethe University Frankfurt - Marketing

Christian Schlereth

WHU - Otto Beisheim School of Management

Nina Mazar

Boston University - Questrom School of Business

Bernd Skiera

Goethe University Frankfurt

Date Written: March 7, 2015

Abstract

Advance payment systems represent a pricing innovation, in which companies predict customers’ future consumption for the following year and then bill a series of monthly, uniform advance payments. Any difference between predicted and actual consumption gets settled at the end of the year with a refund or extra payment. Companies thus gain earlier access to funds and lower risk of customer defaults; customers benefit from predictable monthly payments. However, customers’ reactions to a refund or extra payment sequence in an advance payment system remain unclear. Three theoretical lenses offer predictions about customers’ advance payment system preferences: prospect theory, with a focus on silver lining and hedonic editing principles; mental accounting; and the value of sequences. Using three empirical studies with survey and billing data of more than 20,000 customers to examine their reactions to refunds and extra payments, this paper reveals that receiving a refund reduces customers’ price awareness, increases their recommendation likelihood, and reduces churn and tariff switching, as long as the refund is not too high. The findings illustrate both the consequences and the boundary conditions of the silver lining principle with large-scale field studies.

Keywords: innovation; pricing; satisfaction; payment sequence preferences

JEL Classification: D70, D40, M30

Suggested Citation

Schulz, Fabian and Schlereth, Christian and Mazar, Nina and Skiera, Bernd, Advance Payment Systems: Paying Too Much Today and Being Satisfied Tomorrow (March 7, 2015). International Journal of Research in Marketing, 32 (3), 2015 Forthcoming , Rotman School of Management Working Paper No. 2575159, Available at SSRN: https://ssrn.com/abstract=2575159

Fabian Schulz

Goethe University Frankfurt - Marketing ( email )

Frankfurt
Germany

Christian Schlereth (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56719
Germany
00492616509455 (Phone)

HOME PAGE: http://www.whu.edu/digital

Nina Mazar

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Bernd Skiera

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt, 60323
Germany
+49 69 798 34640 (Phone)
+49 69 798 35001 (Fax)

HOME PAGE: http://www.skiera.de

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