Issue 15 of The Psychology of Pricing
In the previous lesson, we introduced the concept that paying can be painful. To really understand the pain of paying, it’s key to understand the importance of salience and timing:
People feel more pain when they see money physically leaving their hands: Carey Morewedge and his colleagues were interested in the spending habits of people paying with cash and credit. The researchers devised a study in which they checked the receipts of people as they left a grocery store. They found that the customers who paid with cash spent significantly less money ($6.65) on average than customers who paid with a credit ($11.45) or debit card ($11.08). Paying with cash hurts, so people refrained from spending it more than the people who swiped their cards. (1) Other studies have found that consumers who pay with credit cards rather than cash give larger tips at restaurants and shop more every time they visit a department store. (2)
People feel more pain if they pay after they consume: In a study asking people about booking a holiday, researchers found that consumers prefer to pay (and are also likely to be willing to pay more) for a vacation to the Caribbean before taking the vacation than after. In the pre-payment arrangement, the pain of paying might be mitigated by pleasant expectations of taking the holiday, even though the actual subjective perceived value of the vacation is the same both before and after taking it. (3)
Applying this insight
At their resorts, Disney gives visitors “Magic Bands” which are wristbands tied to their credit cards or resort room. To pay for their purchases, the visitors then just tap their wrist on a little Mickey face symbol at all the registers. The pain of paying is reduced, but it’s also very easy to overspend.
To successfully reduce the pain of paying, you should address both the timing and the salience of the payment.
When is it good to reduce the pain of paying? When is it bad?
(1) Morewedge, C. K., Holtzman, L., & Epley, N. (2007). Unfixed Resources: Perceived Costs, Consumption, and the Accessible Account Effect. Journal of Consumer Research, 34(4), 459–467. http://doi.org/10.1086/518540
(2) Feinberg, Richard A. (1986). “Credit cards as spending facilitating stimuli: A conditioning interpretation.” Journal of Consumer Research, 13(3), 348-356.
(3) Prelec, D., & Loewenstein, G. (1998). The red and the black: mental accounting of savings and debt. Marketing Science, 17(1), 4–28. http://doi.org/10.1287/mksc.17.1.4