Here’s a question, as we close up Q1 of this year: how’re you doing on your new year’s resolutions? Like me, maybe one of your resolutions is to stay physically fit. So you make a pact to visit the gym regularly. I must admit that I dread going to the gym at the beginning of the new year. Why? Because it’s crowded and I end up having to wait to use the machines that, at other times of the year, are readily available.
If you have a gym membership, have you noticed this (annual) pattern? The gym is much more crowded at the beginning of the year than it is, say, in October or November. Is it all due to new year’s resolutions, or is there something else at play? What if I told you that gym memberships are intentionally structured to generate their biggest profits later in the year, when the fewest people are working out?
As UX professionals, we’re often keenly interested in what drives usage. In this article, we’ll look at a critical driver of usage patterns and why usage of products and services is important for customer retention and the health of your business.
Timing is everything
Some time ago, researchers analyzed the usage patterns of 200 members of a health club in Colorado, where members could select from four possible payment plans: annual, semiannual, quarterly, and monthly. It turns out that those who made payments most frequently also had the best attendance. In fact, analysis of the data showed that usage patterns closely tracked whatever payment schedule a given member had selected, as shown below:
Why would the payment schedule have such a significant impact on gym usage? Within the scope of this study, the reason was unclear, but a follow-up experiment endeavored to unearth the answer to this question by presenting a hypothetical scenario to a variety of individuals to see how they would respond:
Six months ago, you reserved a ticket to a theater event. Yesterday, you went to the box office and paid $50 for your ticket, which is nonrefundable. Today, you’re feeling ill. Since the event is tonight, will you attend or stay home?
Almost 60 percent of respondents said they would attend anyway, as they didn’t want the ticket to be wasted. The researchers then presented a slightly different scenario to different group of individuals. The difference in the second scenario was that the ticket had actually been paid for six months ago (not yesterday, as in the first scenario). This time, less than 30 percent of the respondents said they would attend the event.
The immediacy of payment drives attention to the cost of the event
The only difference between the two scenarios is the timing of payment. Why would the timing of payment – how close or far it was from the date of the event itself – motivate these different rates of attendance? Well, it turns out that the timing—the immediacy of payment—drives attention to the cost of the event. And let’s face it, costs are painful. So when people are made aware of the cost, they react by wanting to make the most of what they’ve purchased, instead of letting it to go to waste. That, in turn, drives motivation to use the product or service – even sometimes, at the cost of something else, like one’s health or level of enjoyment.
Another example in the study asked college students to assume they had purchased tickets for two different ski trips, only to realize later that both trips were scheduled for the same weekend. One ticket had cost $50 while the other cost $100. Students were told they knew they’d actually have more fun on the $50 trip. Knowing this, which trip would they choose? Because of the salience of the cost, most of them said they would choose the $100 trip!
This speaks to the power of the value people place upon the cost of what they’ve purchased. To justify the expense, usage of the product or service becomes tantamount to other things that are also important – like the value of one’s health, enjoyment, or actual preferences.
Using Payment Design to Drive Usage
We see here, then, that the design of the payment schedule can be crucially important in driving the usage of a product or service. Why is this important? Why should companies care about level of usage? Health clubs, for example, might prefer to receive the entire membership payment from customers up front, without being concerned about the extent to which members actually use the facilities. Indeed, it might even be to their benefit if usage falls off during the year, since equipment wear and tear would then be reduced, along with maintenance expenses.
But what about when the end of the year approaches and the time for membership renewal rolls around? For those who no longer attend regularly, how likely is it that they’ll renew their membership? That big one-time renewal fee can loom large for those who are not necessarily making use of their membership. Many customers may not become repeat buyers unless they are actively using the product or service they’ve purchased.
And this is one reason why companies should care about usage. For health clubs – and most other businesses, as well – it costs a lot more to acquire new customers than to keep existing ones. Customer retention depends a lot on the extent to which products and services are actually being used or consumed.
It’s also important for businesses that have a two-part revenue stream such as movie theaters, sports arenas, and concert halls. Although ticket sales are the primary revenue stream for these industries, there is additional profit to be made from parking fees, refreshments, souvenirs, etc. But this revenue will never be realized if people aren’t actually using their tickets and attending the events.
From a digital perspective, many websites offer a free trial of their product. The DocuSign site, for example, allows you to download a free trial prior to purchase. This strategy is effective because it enables people to try something risk-free in order to determine if they really want to pay for it. In other words, these sites promote usage first, in order to provide prospects a comfort level in purchasing the product. But unless users continue to use the product once they’ve completed the purchase, they may be unlikely to renew. And many companies make more money selling upgrades than selling the initial application.
And what about the impact of usage on social media? You can’t generate recommendations and positive word of mouth from customers who aren’t actively using your product or service.
Many companies give considerable attention to determining the right price for a product or service, but not so much to the timing and schedule of payment. In general, there are three different scenarios that can occur in regard to the timing of paying and consuming:
- We pre-pay, and consume later
- We pay at the same time we consume, so that payment and consumption occur almost simultaneously
- We consume something first, and then pay later
Many businesses prefer that customers pay up front because they receive payment earlier rather than later. In a previous article, I discussed how pre-paying can also help people find more enjoyment during the actual consumption experience –because the pain of payment is distanced from when the product/service is actually used. In fact, sometimes consumption can actually end up feeling ‘free.’
Similarly, if payment is painful, the timing of when that payment is required is key to minimizing customers’ perceived discomfort. It’s kind of like how doctors often keep lollipops and other distractions in their office, for when they’re giving kids vaccinations, as brilliantly demonstrated in the video below:
See that? Barely a peep!
In light of our discussion in this article, though, there is a potential downside to prepayment. When payment and consumption are distanced enough so that consumption begins to feel free, people can end up discounting the value of the product or service precisely because it does feel free. In short, free fails to motivate usage. A ‘pay as you go’ paradigm is the one that motivates usage because of the way in which it draws attention to the cost.
Bundled vs. Itemized Pricing
Price bundling is another aspect of pricing that can have an impact on usage. One advantage of bundling is that it hides the cost of individual items that are included in the bundle. Examples of price bundling include season tickets for concerts and sporting events, subscriptions to online or print publications, and the membership fee for health clubs and country clubs. Price bundling is also commonly used in retail sales.
Businesses assume that hiding the itemized costs through bundling will be beneficial for actually making the sale. But hiding or masking the costs of individual items in a bundle can have a downside. Because the (itemized) costs are made less salient, and costs help people understand what each item is truly worth, bundling can have an adverse effect on usage.
Itemized costs help people understand what items are worth, so bundling can have an adverse effect on usage
For example, researchers analyzed attendance data for a Shakespearean summer festival season which included four performances. The data showed that some people had purchased tickets to a single play while others had purchased tickets for anywhere from two to all four plays. The no-show rate was less than 1 percent for those who had purchased only one ticket, and rose respectively as the number of tickets purchased increased.
That is, as the size of the bundle increased, so too did the no-show rate. In fact, for those who had bought all four tickets as a bundle, the no-show rate rose 35-fold, compared to those who had purchased only one ticket.
So we see that pricing methods that hide the cost can have a demotivating effect on usage. Many people who have medical insurance through their employer are set up to have their monthly premiums auto-deducted from their paycheck. Even though these payments occur monthly, they are essentially hidden, since they occur automatically, requiring no effort on the part of the employee to actively make the payment.
While this might be a good thing in some ways, it also has a potential downside. Many HMOs and other insurance providers prefer that members take the initiative to get annual physicals as well as suggested routine tests and procedures, etc. However, studies show that member compliance is low. How could HMOs more effectively motivate healthy behaviors?
Using Pricing Design to Drive Demand
Researchers suggest that making the costs of these services more salient, by itemizing the price of individual services and fees within the bundled cost, would raise awareness of money spent on those services. Reminders could be sent to members who are not using or consuming the services during the year, in order to make the out of pocket cost more salient, thereby providing an incentive for maximizing the benefits of the medical plan.
Or consider the example of the health club we’ve been discussing. It’s frustrating when a trip to the gym turns into more of a waiting game than an actual workout, when attendance is at its peak at the beginning of the year. Consider how the design of the billing cycles might be used to offset the strain on facilities driven by new year’s resolutions. One idea offered by researchers is that the health club could stagger billing cycles by offering 10 or 14-month contracts, to compensate for the cycle of January renewals.
The Power of Design
UX professionals are inherently interested in how and when people use the products and services they purchase. In this article, we’ve examined how the power of pricing design impacts and drives usage. This is a very practical example of how design matters!
Some people conceptualize design as being an aesthetic – the ‘frosting on the cake’ that makes things pretty. But this kind of thinking is way too narrow. Effective design has the power to motivate behavior, compel usage, and ultimately, drive your business.
Studies referenced in this article:
Pricing and the Psychology of Consumption
Self-control in the Market
Transaction Decoupling: How price bundling affects the decision to consume
The Psychology of Sunk Cost
Payment Depreciation: the behavioral effects of temporally separating payments from consumption (Paywall)