13. One-time payment or payment in installments?

In one of our previous emails, we discussed breaking down prices into smaller units, showing customers, for example, the daily cost of a service instead of presenting the monthly fee. However, the situation looks a bit different when it comes to the payment stage. Is it better to offer one payment for a year in advance, or to split it into 12 monthly payments?

Considering the previous examples, one might think it is better to offer the customer a fee of 100 PLN per month rather than a one-time payment. After all, visually, the cost of 100 PLN seems more attractive than 1200 PLN.

However, it turns out that in many cases, it is more beneficial to ask the buyer for a one-time payment of a larger amount rather than splitting it into many payments. Why is that?

Paying is not a pleasant activity for anyone. Research has shown that people respond better to one large payment than to many smaller ones. The negative feelings are concentrated in a single moment, whereas with installment payments, we “suffer” multiple times¹.

Unfortunately, this is not a universal solution. Sometimes external factors make installment payments more advantageous. A 1998 study² examined the approach to installment payments in a fitness club. According to theory, a one-time payment would be the best option for both the customer (performing the unpleasant act of payment only once) and the seller (receiving the money upfront). However, the experiment showed that the fitness industry is an exception to this rule.

Immediately after a one-time payment, customers did use their membership, wanting to “recoup” the money, but over time their attendance and motivation declined. In the case of monthly installment payments, those who purchased memberships maintained higher attendance for longer, and by the end of the contract, they were more likely to renew it for another term.

It is therefore worth considering which payment method will be more profitable. On one hand, you can minimize the customer’s “pain” caused by multiple payments and receive payment upfront. On the other, reminding the customer of the availability of services through payments can increase satisfaction with the service, as the customer will be more inclined to use it. As a result, the likelihood of renewing the contract is greater.

[1] Schmidt-Gallas and Orlovska, 2012, “Pricing Psychology: Findings from the Insurance Industry”
 [2] Gourville and Soman, 1998, “Payment Depreciation: The Behavioral Effect of Temporally Separating Payments from Consumption”

In one of our previous emails, we discussed breaking down prices into smaller units, showing customers, for example, the daily cost of a service instead of presenting the monthly fee. However, the situation looks a bit different when it comes to the payment stage. Is it better to offer one payment for a year in advance, or to split it into 12 monthly payments?

Considering the previous examples, one might think it is better to offer the customer a fee of 100 PLN per month rather than a one-time payment. After all, visually, the cost of 100 PLN seems more attractive than 1200 PLN.

However, it turns out that in many cases, it is more beneficial to ask the buyer for a one-time payment of a larger amount rather than splitting it into many payments. Why is that?

Paying is not a pleasant activity for anyone. Research has shown that people respond better to one large payment than to many smaller ones. The negative feelings are concentrated in a single moment, whereas with installment payments, we “suffer” multiple times¹.

Unfortunately, this is not a universal solution. Sometimes external factors make installment payments more advantageous. A 1998 study² examined the approach to installment payments in a fitness club. According to theory, a one-time payment would be the best option for both the customer (performing the unpleasant act of payment only once) and the seller (receiving the money upfront). However, the experiment showed that the fitness industry is an exception to this rule.

Immediately after a one-time payment, customers did use their membership, wanting to “recoup” the money, but over time their attendance and motivation declined. In the case of monthly installment payments, those who purchased memberships maintained higher attendance for longer, and by the end of the contract, they were more likely to renew it for another term.

It is therefore worth considering which payment method will be more profitable. On one hand, you can minimize the customer’s “pain” caused by multiple payments and receive payment upfront. On the other, reminding the customer of the availability of services through payments can increase satisfaction with the service, as the customer will be more inclined to use it. As a result, the likelihood of renewing the contract is greater.

[1] Schmidt-Gallas and Orlovska, 2012, “Pricing Psychology: Findings from the Insurance Industry”
[2] Gourville and Soman, 1998, “Payment Depreciation: The Behavioral Effect of Temporally Separating Payments from Consumption”