Long-term bundles or monthly payment plans – which pays off in the long run?

You and your friend joined the gym and committed to a one-year membership.  You opted for the annual payment plan of $600 at the time you signed up.  However, your friend decided on a monthly payment of $50.  Which of you worked out on a regular basis and renewed the membership?

In this week’s article, we continue our pursuit in understanding Price Discrimination and the Psychology of Consumption, today we focus on the latter. The Psychology of Consumption according to tactics.convertize.com is an “important concept that looks not only at selling a product or service but at how the after-purchase consumption rate is important in guaranteeing repeat purchases”. Research has shown that customers who purchase a plan or bundle long term (yearly) are more likely to, after the first three months, become uninterested in the product and stop using it as opposed to customers who renew monthly or weekly.

For example, you and your friend’s gym membership. Whilst the one-off payment would have helped you in reducing the pain of paying as it condensed what could be a large amount of money into one smooth transaction, it also reduced the chance that you would work out regularly and eventually renew your gym membership.   According to tactics.convertize.com, studies have shown that people with annual membership utilize them heavily during the first two to three months whilst the amount they’ve paid is fresh in their minds, but when the sunk-cost effect has dissipated somewhat, they only use it infrequently, if at all, and are highly unlikely to renew at the end.  “A sunk cost refers to money that has already been spent and cannot be recovered.” : Investopedia.

 In contrast, people who pay membership monthly are constantly reminded how much it is costing them and so the sunk-cost effect stays intact, motivating them to make the most of it, which ultimately means they’ll see the most benefits and be much more likely to want to continue longer term.

 John T. Gourville and Dilip Soman in a Harvard Business Review article titled “Pricing and the Psychology of Consumption” said “People are more likely to consume a product when they are aware of its cost,-when they feel ‘out of pocket’. And a customer who doesn’t use a product is unlikely to buy that product again.” They believe that one of the first steps in building long-term relationships with customers, is to get them to consume products they’ve already purchased because research has repeatedly shown that the extent to which customers use paid-for products in, say, one year determines whether they will repeat the purchase the next year.

So, instead of focusing on securing an initial purchase, focus on ensuring that customers use your product or service.
 
This article was co-written by Brittnee James 

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