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Ask HN: Psychology research on value perception of different pricing models?

17 points by paulhart ↗ HN
I asked this over at ask.metafilter, but I thought it'd be at least as valuable to ask here too:

I'm developing a service that I'm going to sell as a subscription with additional top-up payments as required. The idea of a subscription is really nice, as it provides a guaranteed base income per customer. However, the total value of a customer is dependent on the length of time they remain a customer (I know, obvious).

For this product, the subscription payment is a credit towards the use of the service. Commonly (such as in the cellphone subscription model), these credits are "use it or lose it" on a periodic basis. From a business perspective, I understand how the subscription designer would like to be able to "capture" the revenue as quickly as possible and have a handle on the profit level per customer. Also, the customer often has to "hit a hole in one" to maximize their value from the subscription pricing.

However, another model is possible - where the customer's unused credit accrues over each subscription period (this is the "rollover minutes" thing on steroids). This will result with the customer seeing that they have, say, $150 in "potential value" associated with the subscription - an amount many times more than the subscription amount, and something they will lose if they decide to cancel the service.

I'm interested in research into how people react to these kinds of situations, and whether there is a "breaking point" at which the customer decides that the potential value has become a liability rather than a positive thing.

NB: I don't see the pricing model as being a substitute for a great product, but everything matters.

11 comments

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mikecane
I seriously suggest reading "Predictably Irrational," which goes into the psychology of pricing and the behavior of buyers in very surprising ways.
zaidf
Seconded. No book has made me more conscious of my spending habits!
mseebach
I can't point to any research, but it seems the bias lately is "keep it simple", which would point to your second option.

You can add a simple "expiring credit" function like Skype has (if your account is untouched for a year, they tell you to begin using it, however little, or lose it) to keep your books sane, and a service to transfer money out for e.g. a $10 fee.

paulhart
This is a good point.

There are a few examples like this where people buy credits and they expire at some point in the future. The same can be done with a subscription credits service by tracking aging Accounts Payable.

iamelgringo
You're looking for a field called Behavioral Economics. There's a lot of research that's being done in this area right now. Dan Ariely's book, "Predictably Irrational" is a great introduction, and he was a good bibliography for further reading as well.
durana
I've never priced a product or service myself, but thinking about the roll over credit model from the consumer perspective I see a potential problem. If a subscriber's usage never exceeds the monthly minimum, then that subscriber is going to roll over credits every month and accumulate credits they will never use. The value of those rolled over credits that will never be used will highlight to the subscriber how much money they have paid for credits they didn't use. No one likes to know they are wasting money by paying for more than they need.

I don't know what your service is, so I can't reason about how subscribers would use it from month to month, but I would think you could control the amount of roll over credits accumulated by setting the monthly minimum low enough that most subscribers go over it and use accumulated credits.

thefool
This is a great point. Without some sort of expiration system, keeping credits will probably convince the person to ultimately drop the service.
paulhart
Agreed, this is my "cynical customer" perspective, the "breaking point" I alluded to above.
promethean
Be sure to consider the accounting & customer service costs of whatever model you choose. A one-time fee is is easy to administer, while a recurring cost is an order of magnitude more complex, and recurring costs with roll-over and top-up ability yet another order of magnitude more complex-- And not just from your side, but the mental burden it inflicts on the user. Recurring costs, no matter how small, always present a greater mental barrier to purchase than a one-time fee.
paulhart
This is a great point. I'll need to talk to some accountant-types before going forward with this so I can understand what I can and can't book as revenue in this model.

It seems clear that spent credits are revenue, but unused credits live in a kind of gray area, waiting for something to happen.

There may have to be an expiry, but I'll make it distant enough that it's unlikely to be hit (i.e. a year). If people look like they're going to hit that expiry period, I'd rather tell them "you're giving us money for something you don't seem to use, maybe it's time to cancel".

realitygrill
Predictably Irrational is the fun intro, but a better overview of the subject is Poundstone's Priceless - The Myth of Fair Value (and How to Take Advantage of It). It's a newer book and doesn't focus so much on Ariely. I just took a behavioral economics class last semester and kind of feel like Priceless is giving me a better feel for the field than my actual class did.

I'm actually very interested in this problem space and will be thinking about it in my spare time, so email me if you want to discuss it.