Long-term bundles or monthly payment plans – what pays off in the long run? – Projector

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You and your friend have joined the gym and committed to a one-year membership. You opted into the $600 annual payment plan when you signed up. However, your friend has decided on a monthly payment of $50. Which of you trained regularly and renewed your membership?

In this week’s article we continue our quest to understand price discrimination and consumer psychology, today we focus on the latter. Consumer psychology according to tactics.convertize.com is an “important concept that examines not only the sale of a product or service, but also the importance of post-purchase consumption rate in ensuring repeat purchases”. Research has shown that customers who purchase a long-term (annual) plan or package are more likely after the first three months to lose interest in the product and stop using it, unlike customers who renew monthly or weekly.

For example, you and your friend’s gym membership. While the one-time payment would have helped you reduce the pain of paying as it condensed what could be a large sum of money into one smooth transaction, it also reduced the chances that you would train regularly and eventually renew your subscription. at the gym. According to tactics.convertize.com, studies have shown that people with annual subscriptions use them heavily in the first two or three months when the amount they paid is fresh in their minds, but when the effect of sunk cost has dissipated somewhat, they use it rarely, if at all, and are very unlikely to renew it in the end. “A sunk cost refers to money that has already been spent and cannot be recovered.” : Investopedia.

In contrast, people who pay a monthly membership are constantly reminded how much it costs them and so the sunk cost effect remains intact, motivating them to make the most of it, which ultimately means they will see the more benefits and will be much more likely to want to continue in the longer term.

John T. Gourville and Dilip Soman in a Harvard Business Review article titled “Pricing and the Psychology of Consumption” stated, “People are more likely to consume a product when they are aware of its cost, when they feel ‘short of resources’. And a customer who does not use a product is unlikely to buy that product again. They believe that one of the first steps in building long-term relationships with customers is to get them to consume products they have already purchased, as research has repeatedly shown that the extent to which customers use paid products in, say, one year determines whether they will repeat the purchase the following year.

So instead of focusing on securing an initial purchase, focus on ensuring customers use your product or service.

This article was co-authored by Brittnee James

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Elaine R. Knight