15. When should you charge for a product? On the phenomenon of payment depreciation

Contrary to the widespread trend of postponing payments (buy now, pay the first installment in six months), research shows that it is better for the customer to pay before using the product/service. Moreover, the earlier, the better¹.

This is due to a phenomenon called payment depreciation. It was illustrated in a publication by Gourville and Soman using the example of buying a theater ticket². Two people bought tickets to the theater. Person A bought the ticket some time ago, while Person B purchased it on the day of the performance. On the day of the show, the weather made it very difficult to get to the theater. In such a situation, Person B will be much more motivated to attend the performance and use the recently purchased ticket. On the other hand, Person A will be less motivated to attend, as they bought their ticket several weeks earlier, making the perceived loss from not using it smaller.

The phenomenon of payment depreciation can be used in several ways. On one hand, you can encourage customers to purchase products in advance (e.g., preorders for music albums or video games). On the other, you can extend the time between purchase and consumption by offering the product in larger packages. Additionally, this takes advantage of the effect that product usage increases when it is available in larger packages³. This effect can be easily observed with razor blades – the fewer new blades left in the pack, the longer people tend to use a single blade.

The opposite effect occurs when payment for a product or service is postponed so long that it happens after consumption. Over time, the perceived utility value of the purchased product decreases, making the payment feel more negative. The “pain” is smaller when paying for a car wash before the service than if the payment were required, for example, two weeks after the wash, in winter, when the car is already dirty again.

In summary, when setting a payment system, you should consider not only what some customers expect (e.g., deferred payment systems) but also what will be perceived more positively in the end. Therefore, it is advisable to extend as much as possible the time between payment and the end of the customer’s use of the service/product. This can be achieved, for example, by introducing preorders or increasing package sizes.

[1] Simon, Fassnacht, 2019, Price Management
[2] Gourville and Soman, 1998, Payment Depreciation: The Behavioral Effects of Temporally Separating Payments from Consumption
[3] Wansink, 1996, Can Package Size Accelerate Usage Volume?