The Impact of Consumption Goals on Flat-Rate Choice

Abstract

Flat rates are a dominant pricing scheme in many consumer service industries that largely benefit service providers: Many customers exhibit a bias and choose flat rates even though a pay-per-use plan would be less expensive for them. Yet, whereas the degree of flat-rate bias varies strongly across services, no study has determined whether consumers’ consumption goals might influence its extent. The authors argue and show that consuming services to attain hedonic gratification leads to a significantly higher flat-rate bias than using services to fulfill utilitarian needs. The three well-known flat-rate bias effects (taximeter, insurance, and overestimation) fully mediate the relationship between the consumption goal and flat-rate bias. In three experimental studies, the authors consistently show that these findings apply across different services, for a service that relies on natural variance in customers’ consumption goals, and for the same service framed as hedonic, utilitarian, or a hybrid. These findings show that managers need to be aware of major “natural” industry differences in the level of flat-rate bias. However, service providers can also actively manage and increase consumers’ hedonic consumption goals for their services and thus increase their share of flat-rate contracts. A further experiment shows that the hedonization tactic has no negative side effects on consumers’ price perceptions in terms of willingness to pay (WTP). Service providers can benefit from hedonizing their services as long as it is compatible with their value proposition.

An Experimental Analysis of Overconfidence in Tariff Choice

“…They demonstrate that the so-called insurance effect (i.e., avoidance against monthly variations in bill amounts) and taxi-meter effect (i.e., when the ticking taxi meter lowers the consumption enjoyment) lead to a flatrate bias. Uhrich et al (2013) replicate these findings and demonstrate that consumers with 5 a more hedonic (rather than utilitarian) consumption goal exhibit a stronger preference for the flat-rate.…”

“…One can distinguish two broad streams of literature in tariff research. One stream of literature analyzes drivers of tariff choice (e.g., DellaVigna & Malmendier, 2006;Uhrich, Schumann, & Wangenheim, 2013). The other stream of literature studies consumer behavior given a chosen tariff (e.g., Iyengar, Jedidi, Essegaier, & Danaher, 2011;Leider & Şahin, 2014).…”

“…The other stream of literature studies consumer behavior given a chosen tariff (e.g., Iyengar, Jedidi, Essegaier, & Danaher, 2011;Leider & Şahin, 2014). Focusing on tariff choice, several studies showed that consumers do not always pick the tariff that minimizes their billing rate (e.g., DellaVigna & Malmendier,4 2006; Lambrecht & Skiera, 2006;Train, McFadden, & Ben-Akiva, 1987;Uhrich et al, 2013). The majority of these studies finds mostly flat-rate choices and a flat-rate bias (DellaVigna & Malmendier, 2006;Lambrecht & Skiera, 2006;Uhrich et al, 2013).…”

“…Focusing on tariff choice, several studies showed that consumers do not always pick the tariff that minimizes their billing rate (e.g., DellaVigna & Malmendier,4 2006; Lambrecht & Skiera, 2006;Train, McFadden, & Ben-Akiva, 1987;Uhrich et al, 2013). The majority of these studies finds mostly flat-rate choices and a flat-rate bias (DellaVigna & Malmendier, 2006;Lambrecht & Skiera, 2006;Uhrich et al, 2013). DellaVigna and Malmendier (2006), for example, found that consumers chose the flat-rate tariff too often in a gym setting and Lambrecht and Skiera (2006) showed that consumers primarily had a flat-rate bias in the context of Internet access.…”

The Existence and Persistence of the Pay-Per-Use Bias in Car Sharing Services

“…Other papers focus on Uber and its surge pricing mechanism, which it uses to clear markets in the short-term (e.g., Hall, Kendrick, & Nosko, 2015). 4 In terms of tariff research, studies analyzing the drivers of tariff choice (e.g., DellaVigna & Malmendier, 2006;Uhrich, Schumann, & Wangenheim, 2013) and studies investigating consumer behavior given a certain tariff choice (e.g., Iyengar, Jedidi, Essegaier, & Danaher, 2011;Leider & Şahin, 2014) can be differentiated. Several studies focusing on tariff choice show that consumers do not always pick the tariff that minimizes their billing rate (DellaVigna & Malmendier, 2006;Lambrecht & Skiera, 2006;Train, McFadden, & Ben-Akiva, 1987).…”