Paying with Money or Effort: Pricing When Customers Anticipate Hassle
Published 2/1/2012
Author: Anja Lambrecht and Catherine Tucker
View this contentExecutive Summary
For many services, customers subscribe to long-term contracts. Standard economic theory suggests that customers evaluate a contract as the sum of benefits and payments. The authors suggest that rather than evaluating multiperiod service contracts at the contract level, customers use period-level bracketing: They evaluate the distinct per-period loss or gain they incur from choosing this contract. This has important consequences when benefits vary over the course of the contract, for example, due to “hassle costs.” If customers use period-level bracketing, they will value a lower price more in periods where they have hassle than in other periods. The authors explore this using data from a field experiment for web hosting services.
The field experiment varied whether consumers believed there would be hassle in setting up the service. It also varied whether a lower price was offered in the first period. The authors find that a lower price in the first period is more attractive to customers when they expect their hassle costs to be high at setup. In multiple additional lab experiments, the authors support and extend the field experiment’s findings. They find evidence for period-level bracketing when customers have hassle costs, independently of whether hassle costs occur in the first, an intermediate, or the last period of a contract. They also rule out alternative explanations such as high consumer discount rates. Their findings suggest that in setting prices, firms should consider the timing of hassle costs faced by customers.
Biography
Anja Lambrecht is an Assistant Professor of Marketing at London Business School. Her research explores customers’ choices and customers’ usage behavior under (nonlinear) pricing plans. She uses these insights to derive recommendations for firms’ optimal pricing decisions. An additional stream of her research focuses on understanding customers’ behavior in online environments and their adoption of new service technologies. Professor Lambrecht received her PhD from Goethe-University, Frankfurt, Germany.
Catherine Tucker is currently the Douglas Drane Career Development Professor in IT and Management and Associate Professor of Marketing at MIT Sloan School of Management. She specializes in understanding how the huge amounts of data generated by the ICT revolution can better guide marketing and advertising decisions. She also thinks about the privacy concerns that such data raise and how firms and policy makers can best address them. Finally, she has also done substantial research into how health-care information technology and the digitization of patient data is transforming the health care sector. She received the National Science Foundation Career award for her work on digital privacy. She is an Associate Editor at Management Science. She received her PhD in Economics from Stanford University.
Journal of Marketing Research, Volume 49, Number 1, February 2012
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