Competing advertisements by service providers, such as internet and cable television companies, tend to focus on the lack of problems their customers face. They offer reassurances about the ease of setting up their service or the ease of leaving. And, especially on television, firms often play up the hassles involved in dealing with their main competitors.
Clearly, service providers are aware that customers want, above all, to avoid hassles. Given that hassles are inevitable, however, even during regular maintenance of services, providers would benefit from knowing the extent to which adjusting prices to reflect periods in which hassles occur can affect customer choice.
When it comes to services with long-term contracts, Anja Lambrecht, Assistant Professor of Marketing at London Business School, and Catherine Tucker, Assistant Professor of Management Science at MIT’s Sloan School of Management, tried to determine how firms can use pricing to respond to hassle for consumers that may inevitably arise in a contract. Specifically, they analysed data collected from a field experiment conducted by a Web hosting provider in the UK and conducted six lab experiments aimed at evaluating the three stages at which hassles typically occur. They performed two lab experiments for each period of hassle:setup, maintenance and disposal. For setup, their experiments focused on Web hosting services and fibre-optic providers; for maintenance, they addressed cable television and water pipelines; and for disposal of services, they looked at television services and vacation rental agreements.
Conventional economic wisdom holds that customers evaluate payments and benefits at the contract level; but the authors believed that customers, in reality, evaluate benefits and payments at the level of each billing period, for example at each month. This is important if customers anticipate that at specific points in time, they will incur hassle, that is effort or inconvenience, in a service contract. For example, in the setup stage, customers may anticipate that setting up their satellite or cable TV involves hassle. Similarly, maintenance or cancelling a contract may require hassle. If a firm is willing to give a discount in their service contract, conventional wisdom suggests that customers would always prefer to have it earlier rather than later. However, the authors suggest that when customers anticipate hassle, they prefer a discount in the period of hassle rather than in other periods of the contract.
Each of the lab experiments they conducted involved panels of about 100 participants who were asked to respond to different possible ways of pricing — each alternative tied to how the customer might be most satisfied with the ‘costs’ of hassles they might face in the future.
Lambrecht and Tucker’s study provides strong evidence that customers prefer that the patterns of their payments reflects the patterns of their hassle costs on a per-period level. They refer to this as periodlevel bracketing. For example, customers would generally prefer to get a discount in the month of hassle rather that at a different point in time. This held even if this would mean deferring the discount to a later point in time. Similarly, this preference held whether hassle costs arise at setup, maintenance or disposal of a service contract. They also show that firms can use this to advertise new services: an ad that advertises low hassle in setup only or a discount in the first period only is more effective than an ad that mentions both a discount in the first period and low hassle. The authors show how firms can design pricing schemes that reduce payments in the period of hassle, even if the overall amount the firm charges over the life of contract remains the same.
This article was taken from Business Strategy Review, for the latest business thinking from all London Business School faculty.