Pricing and the Psychology of Consumption – John Gourville and Dilip Soman

Long-term success of a product is based not just on the initial sales, but on how customers use the product.
The consumption of a product can be driven more in a long-term fashion if they are aware of the cost that they
are paying to use the product. Customers can be made aware of the cost through pricing policies of the product.

 Target high consumption for higher sales: If the product needs to be sold more, the customers should consume
the product more.
o Customers who use the product more are likely to become repeat customers than those who that do not.
o Customers who use the product more will use its upgrades thereby establishing high switching costs.
o For two-part revenue model, higher consumption of primary products increases sales of secondary ones.
o Higher consumption of products means higher satisfaction and hence lead to higher word of mouth sales.
 Consumption is driven by cost: If the customer is aware of the cost they have paid, they will feel more compelled
to use the product. This is to avoid the feeling that they have wasted money and is called sunk-cost effect.
 Cost is perceived through pricing: Consumption is driven not by actual cost, but by perceived cost which is driven
by manner of pricing of the product. For instance, a customer will feel cost more when paid by cash than by card.
In addition, those who pay by cash will have higher pressure to consume it than those who paid by card.
 Timing of payment affects perceived cost: If a customer pays near or at the time of consumption, more attention
will be paid to the product’s cost and hence will increase the likelihood of its consumption.
o Sunk-cost effect dissipates over time and the customers become less aware of the cost incurred with time.
o If the customers do not remember the sunk cost, they are less likely to use the product and will treat the
product to have been obtained for free of cost.
o Companies who make the customers pay sooner or later is focussing on short-term advantages. The
customers are less likely to remember the cost of the product in this case. This will reduce product usage.
 Price bundling reduces consumption: Even though price bundling causes a spike in demand in the short-term, it
leads to lower consumption of the product in the long run.
o It is harder for customers to identify the cost of an individual product when it is bundled with other products.
o In an unbundled transaction, customer can map the price and benefits of a product directly, thereby creating
a strong sunk-cost effect and hence, a higher likelihood of consumption.
 Predict the actual demand and practice yield management: Since the actual demand is different from purchased
demand because of the timing/manner of pricing/product bundling, predict the actual demand and plan the
operations accordingly to minimize expenses and maximize revenues.
 Consumption can be smoothened through staggered payments: Since the spike of demand occurs near the
payments, companies can use it to smoothen out the peak and lean consumption periods of a product. For instance,
if the peak usage of a product occurs in January in a year, the 10-month billing for that product or service can be
given at a discount in September so that people who register in September will give high demand in September to
December. This customer set will use the product or service less in January (sunk cost dissipates with time) when
the other customers who sign-up will keep the actual demand at the same rate.
 Link the payments to consumption to increase usage: Another way to increase the consumption is to make the
payments of the product in instalments. This will continuously remind the customers that they are paying to use it.
The customers would also prefer this since it might be more financially manageable.
 Highlight individual costs in price bundling to psychologically link payments to benefits: In price bundling,
customers cannot make out the cost of each product item since these are intentionally hidden. A way to increase
consumption is to explicitly state the cost of each individual product in the bundle after payment so that the
customers are aware of the amount they are losing out on if they do not consume that product.
 Reduce consumption to avoid dissatisfaction during peak demand: It is not always good to increase
consumption. During peak demand, if there is high consumption, it will lead to dissatisfaction because of lack of
products or services. Annual payments can be collected from customers much before the peak demand season so
that customers will feel less need to get their money’s worth during the peak demand.

The way prices are set do not influence just demand, but also influence how the customers use the product.
The usage of a product in turn determines the repeatability of the customers, thus impacting long-term
relationship with the customers. Tactics that mask the prices causes less pressure on customers to use the
product to get the money’s worth and hence jeopardizes long-term relationships.