Persuasive Advertising - J. Scott Armstrong [37]
Easy terms of payment, without extra charge, for those who cannot pay the full price at once.
Wilcox & Gibbs Silent Sewing Machine print ad, 1869
People often find it less stressful to purchase goods when they do not think much about the price. To reduce the stress, separate the painful part, the payments, from the purchase decision.
Installment plans, which provide a way to separate payments from purchases, are often used when purchasing durable goods, such as automobiles. However, they should not be used if the payments linger after the benefits have been fully consumed. People prefer to pay prior to or during consumption of a product rather than to have to make payments after the product has been consumed or the services completed. Thus, they would rather prepay for a vacation than have a series of “easy payments” after the vacation. On the other hand, they are comfortable with easy payment plans as long as they continue to enjoy the goods—as with automobiles. These statements are consistent with conventional wisdom among advertisers.
Consider now the lead-in question. Debit cards are popular because purchasers do not incur debt when they make purchases, as happens with credit cards. The credit card debt hangs over them and they must address this at the end of the month. In addition, they might run over their limit.
Prepayments also provide a way to separate the payment from the benefits. Which offer should the seller of a health club service make: $400 for the coming year or $8 per session? Most customers would prefer to pay the $400 up front for the year. Having prepaid, they will be more motivated to use the health club, and not have to think about whether a visit is worth the cost. It avoids the “taxi-meter effect.” Furthermore, customers tend to overestimate how much they will use a service; therefore, the health club will also profit from the up-front fee system. This principle applies to non-durable hedonic (for enjoyment) products.
Consumers who are trying to curtail a bad habit might prefer to use a painful payment process, such as purchasing one pack of cigarettes at a time. A similar approach might also be used in campaigns to reduce obesity. That is, it could get cooperating restaurants to go on a “cash only” basis for people who sign up to be on a weight-loss program. Alternatively, the weight-loss program could put a block on food purchases under debit or credit cards so those on the program would have to use cash. Restaurants for weight watchers and universities might want to charge for food on a per-ounce basis.
Lab experiments show that people get more enjoyment from purchases if the act of paying is done at a different time than the product is consumed. For this reason, more expensive lump-sum payment plans can sometimes be preferable to consumers over cheaper but frequent payment options (Prelec and Loewenstein 1998).
Would you rather purchase an insurance policy for a $1,600 premium with a promise of a $600 rebate for safe driving, or buy an otherwise equivalent policy for $1,000 with the possibility of having to pay up to $600 for an accident?
1.4.8. State that the price can be prepaid if it might reduce uncertainty for customers or enhance anticipation
Customers do not like uncertainty. So they often prefer to pay a set price upfront instead of an uncertain price in the future.
It might seem rational for people to desire to receive the benefits of a product as soon as possible but to defer paying for as long as possible. However, when it comes to personal behavior, the typical consumer does not think that way. People get enjoyment from the anticipation of planning a pleasant event, such as a vacation, and prepayment can add to this anticipation. Thus, this principle is especially appropriate for advertising hedonic products.
Evidence on the effects of reducing uncertainty about prices
Now back to the lead-in question about insurance policies: Economically, the $1,000 up-front policy is a better buy than a $1,600 policy with a $600 rebate for safe driving because the former