Payment Method Design: Psychological and Economic Aspects of Payments

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ARIELY D., SILVA J., Payment Method Design: Psychological and Economic Aspects of Payments, Center for eBusiness @MIT, 20.08.2002

Type Book
Abstract Paying for goods and services creates disutility for the payer. Based on ideas from

behavioral economics, we contend that the disutility of paying can be substantially influenced by the method of payment. We develop a model of the consumer that takes into account phenomena such as the pain of paying, the sunk-cost effect, and self-control issues. In a laboratory experiment we test this model and the relative magnitudes of these different psychological effects: pain of paying is separated out using a micro-payment method (small payments that require specific confirmation), sunk cost is gauged by comparing the effect of pre-payment with post-payment, and the desire for self control is ascertained using stated preference across different payment methods. The experimental results showed that the pain of paying has a substantial influence on payment, and to a lesser degree so does the sunk cost effect. Subjective preferences for the different payment-methods indicated that respondents are generally aware of the aversiveness of payment, yet are not concerned with self- control.

Topics Business Model, Consumer, Contract, Property


"[P]ayment methods can influence behavior in ways that are not captured by the economic model. Psychological aspects that are not included in the standard economics view include: the timing of payments, (payment before or after consumption); whether the payments are coupled with consumption or separate from it; whether the price is presented in aggregate, as the total expenditure, or as a set of smaller payments; and whether the payment method allows for flexible arrangements. Combined, these elements can create systematic effects of the design of different payment methods on willingness to pay for otherwise identical products and services."

"The experiment had 5 conditions: micro-payments, pre-payments, post-payments, subscription, and a subscription+hassle condition. [...] Micro-payments: In this condition respondents paid for each page they saw. [...] Note that an item that has been paid for was considered purchased, which meant that respondents could revisit previously bought pages as many times as they wanted without incurring additional charges. [...] Post-payments: This condition resembled the micro-payments condition with one main difference: respondents were not asked to approve each transaction. [...] Pre-payments: This condition resembled the post-payments condition with one main difference: respondents were not allowed to view any article or cartoon unless they had sufficient money in their electronic wallet to cover this expense. [...] As long as the amount of money in the electronic wallet was sufficient to cover the pages, the process continued much like the post-payment condition. [...] Subscription: When respondents entered a category they had not subscribed to, they were prompted with a window asking them if they want to subscribe to this category. [...] Subsequent entries to the same category did not involve the subscription window and respondents had free access to view and browse this category as much as they wanted. Subscription+hassle: Overall, this condition was very similar to the subscription condition with one major difference: before showing any article or cartoon, respondents were asked to approve that indeed they wanted to see that item. Note that this added hassle was such that the physical activity in this condition was the same as in the micro-payments condition."

" The first question simply asked which of the payment methods would they prefer. As can be seen in the top row of Table 2, the preference was highest for the subscription condition compared to the other three, which were not different from each other."

"In terms of self-control, the self-reports of our respondents showed that they believe that pay-per-use is a good way to control their behaviour in terms of quality, quantity, time and spending. However, the subjective reports also showed that when given the choice between payment methods they prefer subscription, which they cannot use as a self-control device, but reduce substantially the pain of paying" (page 24).

We may try to apply this research to the current trend of the IoT market, in which - even if there is actually along-time relationship between the provider and the consumer - usually the payment is a lump-sum at the moment in which the consumer acquires the possession of the token that makes the service possible. Among the reasons for the business model chosen, there might be the consumer's pain of paying: paying for the token could be considered the equivalent of a subscription, in which you pay once and for all, and in which therefore consumer's pain of paying is reduced. Businesses should thus prefer this form of payment, because - given that consumers prefer it, rather than pay-per-use (and also, as an intermediary step, periodical fees) - they will more willing to conclude the contract and subsequently to use the product frequently and for a long time. And - considering the fact that often the business model of the firm is focused on the collection of data rather than on the commercialization of the hardware - this kind of approach may be susceptible to foster a greater data collection.

The problems are, however, that: 1) when physical objects are concerned, and consumers pay once and for all for them, they think to be able to use them permanently: even if the free paired service ceases to be provided after a period long enough to reward the sum paid for the hardware, consumers will claim against the supervened unusability of the product; 2) even if, unofficially, the sum is paid for the service, officially it is paid for the token: therefore, if the service ceases to be provided before a period of time sufficient to remunerate the lump-sum paid, nothing will be returned to the consumer, and usually the standard terms accompanying the product even state that the service could be discontinued at any time and for any reason.

Someone may complain about the fact that, in the adaptation of this study to the IoT world, I have approached the periodical fees to the pay-per-use, considering the fact that - in traditional services - the opposite of pay per use is subscription (i.e. periodical fees; think about the flat rates paid to network operators). But traditional services have from the start been considered as "services", where the alternative payment methods could be subscription and pay-per-use (even in the world of contracts for Internet provision, where we have a service + a token - which is the router -, the router has always been seen as a tool to access the service); on the contrary, when dealing with the IoT, the products concerned are traditional items - which have always been subject alternatively to sale or rental - that suddenly become smart and susceptible of providing services: therefore, in consumers' view, the payment method consisting in periodical fees is not the payment method that reduces the most the pain of paying, because there is a further method which causes lesser pain, i.e. a lump-sum paid once and for all.

See also Attitudes and Behaviors of Mobile Network Operator Customers: Contributions toward empirically founded marketing strategies for mobile navigation and Internet services.