16. How to earn more with a one-time flat fee

Customers like to know exactly how much they will pay for a service. A one-time flat fee means that for a service or a set period, a fixed charge is paid that allows unlimited use¹. An example can be found in telecommunications offers, where this payment model is often preferred by customers². This happens even though actual usage under a standard tariff would often cost less than the fixed fee. So why do customers prefer paying a fixed monthly amount instead of paying based on usage?

There are three main reasons:

- a one-time flat fee protects against unexpectedly high charges — the so-called insurance effect;
- you don’t have to worry about excessive usage — with a metered tariff there is a feeling that the “taximeter” is running — the so-called taximeter effect;
- customers overestimate their usage — the so-called overestimation effect.

This means that in many cases, introducing a flat fee can increase profits compared to usage-based charges.

A similar approach to a one-time flat fee is a “premium version” subscription that grants significant discounts and perks. Examples include Empik Premium, Allegro Smart, or Germany’s BahnCard. In this case, customers pay a one-time annual fee to enjoy benefits such as free shipping or product discounts for a year. This creates the feeling that the customer has invested money and must “recoup” it (the sunk cost effect). By leveraging this effect, German railways competed with car travel. Before introducing the BahnCard, customers deciding between traveling by car or train often chose the car, having already invested in it. By introducing the BahnCard, the company made the fixed cost similar (car maintenance cost vs. card cost), and the decision then depended mainly on variable costs (fuel costs vs. ticket prices significantly reduced with the BahnCard)³.

It is worth noting that the one-time flat fee method works best when marginal costs (the cost of producing one additional unit of a product) are zero or close to zero (an additional passenger on a train, the cost of another song streamed on Spotify). Another condition that positively influences the method’s success is natural limitations, such as in the case of an all-you-can-eat buffet or restaurants offering unlimited meals for a set time.

An interesting phenomenon observed by researchers is the relationship between the amount of product consumption and the amount of the flat fee⁴. They conducted a study in a restaurant offering “all-you-can-eat” meals, which found that when the flat fee was reduced by 50%, the amount of food consumed (in this case measured in slices of pizza) decreased by 27.9%. This directly demonstrates the sunk cost effect — the more a customer has paid for a service, the more they try to use it to “recover” the money spent.

In summary, if the marginal costs of a service or product are zero (or close to zero), or the service is naturally limited, it is worth considering introducing a one-time flat fee. On one hand, it can make customers enjoy the service more. On the other, it can increase customer loyalty and make the purchase of additional services seem more attractive.

[1] Simon, Fassnacht, 2019, Price Management
[2] Kramer and Wiewiorra, 2012, Beyond the flat rate bias: The flexibility effect in tariff choice
[3] Simon and Dolan, Marketing Management. American Marketing Association.
[4] Just and Wansink, 2011, The Flat-Rate Pricing Paradox: Conflicting Effects of “All-You-Can-Eat” Buffet Pricing