Hedonic Tariff Choice and Consequences of Flat-Rate Bias

Flat-rate pricing for services is becoming more and more popular. At the same time, the occurrence of a flat-rate bias increases as well: Many customers choose flat-rate pricing even if pay-per-use pricing would have been less expensive for them. Although the degree of flat-rate bias varies, until now, no study has analyzed service characteristics that might influence its extent. In five studies combining three different approaches, Fabian Uhrich shows that customers consumption goals with regard to a service have substantial impacts on their flat-rate choices: Consuming services to attain hedonic gratification leads to a significantly higher flat-rate bias than using services to fulfill utilitarian needs. The more hedonic a service, the higher the taxi-meter, insurance, and overestimation effects. However, more utilitarian value has no significant impact on the flat-rate bias. Thus, by increasing hedonic perceptions of their services, service providers could gain more flat-rate contract customers. In a subsequent step, Uhrich investigates the consequences of a flat-rate bias on customer loyalty. Whereas prior research has found no negative impact of flat-rate bias on customer loyalty, Uhrichs study provides a more differentiated perspective. A survival analysis of two-year transactional data of 21,490 Internet service provider customers reveals that flat-rate bias has a negative effect on churn but not on tariff switching. The expected lifetime of a flat-rate bias customer contract decreases with every overspent Euro by about 1 percent. The relationship between flat-rate bias and the Customer Lifetime Value (CLV) is inversely U-shaped. Low degrees of flat-rate bias increase the CLV while high degrees can reverse this effect. The results of an experimental survey among mobile telephony customers explain these discrepancies to prior findings by showing that the competitive position of a service provider moderates the consequences of flat-rate bias. While low-cost service providers only experience increased tariff switching, premium providers are confronted with an increased churn risk. Managers of premium service providers are therefore advised to carefully evaluate reactions of their flat-rate bias customer base and proactively manage customers with strong flat-rate bias. Low-cost providers, however, have no need for action and can benefit from flat-rates without the danger of churn. They should leverage the positive impact of service hedonization on the flat-rate bias to increase profits.