Imagine you are creating payment plans for car leasing or car financing. For this financial product, you believe you have no leeway to adjust much beyond the core economics of the price.
But wait, why not keep the economics the same and adjust the level of payments over time: should the installments remain the same, should they increase, or should they decrease with the passage of time?
What should you do? We will find out today.
In general, people like improving sequences. People like that something gets better. Research in various domains confirms the general idea that people prefer sequences of improving outcomes over constant or worsening results.
How can we test improving sequences in the context of pricing and payment plans?
Researchers reached out to people who are about to finance a car, and they randomly assigned 1,628 people to three different conditions: the participants would either be offered an ascending profile of payments, a constant profile, or a descending profile.
All conditions had the same net present value and were economically equivalent. Economically, all three conditions were the same.
What do these payment plan profiles look like?
In the ascending profile, over the next four years, customers would pay in the first year $545 per month, and this amount would gradually increase by $200 up to $1,145.
In the constant profile, customers would pay $836 per month for the next four years.
And in the descending profile, customers would pay $1,126 per month in the first year, and it would gradually decrease by €200 to $526 in the last year.
Okay, what do these payment plan profiles affect customers?
Customers were asked about their affective reaction, i.e., how do they feel – is it rather a positive or a negative emotion? And they were asked about their behavioral and evaluative responses to each profile.
More concretely, participants were asked about their perceptions of value, their purchase intentions and their positive word-of- mouth reaction.
What did they find out?
The researchers found out that customers who saw a descending profile had a higher perception of value, had a higher purchase intention, and they were more likely to spread a positive word of mouth.
From an economic perspective, all three conditions are the same. However, the behavioral response is different.
And why is that?
Because customers feel better. Descending profiles solicit a positive feeling.
What did we learn today?
Today we learned that customers like an improving sequence of outcomes.
Translated to pricing, this means if you offer a payment plan with decreasing installments over time, they like your payment plan more.
And this positive feeling makes them perceive the value of your offer as higher. They are more likely to buy your product and subscribe to your payment plan. And they are more likely to tell their friends about this wonderful payment plan. What else can we ask for?
And this very neat tactic might not only relate to financing your car. It could also apply to lowering payments for telecommunication plans or a decreasing sequence of payments for your gym membership.
Peine, K., Wentzel, D., & Herrmann, A. (2012). Getting better or getting worse? Consumer responses to decreasing, constant, and ascending multi-dimensional price profiles. Review of Managerial Science, 6, 81-101.