Precommitment-based Pricing

Abstract

In service marketing, customers typically pay more when they use more. Based on this principle, various non-linear pricing plans or flat-rate tariffs attempt to lure customers into higher use and higher-revenue contracts. An emerging marketing practice we term precommitment-based pricing turns these principles around and asks customers to pay extra when they use the service too little. For example, a local fitness club offers customers a discount when they reach a minimum training frequency, and those who fall short pay a premium. This form of pricing aligns directly with customer objectives and assists them in achieving their goals. In this research, we assess which type of precommitment-based pricing is best suited to pay off for marketers and customers alike. We study whether refunds for high use (prepaid) or premium payments for low use (postpaid) are more effective and find empirically that these different types of payment have a differential impact on service adoption, goal attainment, and retention. Five empirical studies in three service domains demonstrate that prepaid contracts attract more customers, but postpaid contracts increase goal achievement and, thus, loyalty. We test boundary conditions and discuss practical implications on how to implement precommitment-based pricing.

Keywords: precommitment-based pricing, service marketing, customer acquisition, goal achievement, customer retention