Why you prefer to pay $20 a day for a luxury car

Many purchases that we make are based on periodic payments such as phone plans, mortgage, memberships and more.

Standard economic models assume that we place the same value on products with periodic payments and those that involve a one-time payment equivalent – for example, a single payment of $250 a year versus periodic payments of $69 cents per day.

The researchers also found that periodic pricing resulted in a 77 percent increase in sales for a meal delivery service.

Previous studies have shown that pricing affects perceived costs but new research now shows that pricing also affects how we represent a contract’s benefit.

To examine how periodic pricing influences purchase decisions, researchers conducted nine experiments.

In the studies, participants were asked to consider either a daily cost or yearly cost for products and services like charitable donations, newspaper subscriptions, car leases, music streaming services and meal deliveries.

In another experiment, the participants were given a scenario where they can purchase a luxury car for a periodic price of $20 a day or an aggregate price of $7250.

The participants were more likely to agree to daily pricing and they also reported greater perceived benefits.

The researchers also found that periodic pricing resulted in a 77 percent increase in sales for a meal delivery service.

More frequent payments help people appreciate the distinct benefits they derive each day of their purchase, encouraging them to purchase and increase the likelihood of a purchase.

The researchers state that periodic pricing also increases the appeal of the contract when there is high affective involvement such as for hedonic product categories, contracts that contain emotional appeal or under circumstances where the customers fail to appreciate the full magnitude of contract’s appeal.

This can also foster scope-insensitive valuation – where the first few units of a product are valued higher than the subsequent units.

The study provides insight to marketers who can present periodic pricing under the right market conditions to encourage purchasing even for significant sums of money.

It also shows us the psychology behind our decisions to purchase under periodic payments and why we would pay $20 a day for a luxury car– because we feel better about the benefits we receive from our purchases on a daily basis.

Source: University of Chicago Booth School of Business