Paying with Money or Effort: Pricing When Customers Anticipate Hassle

Abstract

For many services, customers subscribe to long-term contracts. Standard economic theory suggests that customers evaluate a contract on the basis of its overall net benefits. The authors suggest that rather than evaluating multiperiod service contracts at the contract level, customers use period-level bracketing. Customers evaluate the distinct per-period loss or gain they incur from choosing this contract. This has important consequences when benefits vary over the course of the contract—for example, due to “hassle costs.” If customers use period-level bracketing, they will value a lower price more in periods during which they have hassle than in other periods. The authors explore this using data from a field experiment for web hosting services. They find that a lower price in the initial period is more attractive to customers when they expect their hassle costs to be high at setup. In five lab experiments, the authors support and extend the field experiment's findings. They find evidence for period-level bracketing when customers have hassle costs, independently of whether hassle costs occur in the first, an intermediate, or the last period of a contract. They also rule out alternative explanations, such as hyperbolic discounting. The findings suggest that in setting prices, firms should consider the timing of hassle costs customers face.

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