It Matters How You Pay: Cost Type Importance Depends On Payment Mechanism

Costs represent one of the central concepts in a wide range of fields of science, such as economics, finance, accounting, and marketing. These fields are interested in different aspects of the cost concept. Within the field of marketing the consumer perspective has recently received much attention with topics such as perceived fairness of costs (e.g., Bolton, Warlop and Alba, 2003), cost comparison across categories (e.g., Gourville, 1998), and influence of past costs on consumer behavior (e.g,. Soman and Gourville, 2001; Soman, 2001).

Two distinct types of costs can be relevant to consumers, average cost and total cost. Average cost is the cost defined per unit of interest, which can be a product unit, a time unit, an event, or an action, etc. Total cost is the cost aggregated over a number of units of interest, products, time, events, etc. Shafir and Thaler (2006) also refer to paying attention to average cost as local perspective and paying attention to total cost as global perspective. Gourville (1998, 1999, 2003) in his studies of “pennies a day” advertising (e.g., framing a price of a sofa in cost per day) proposes that framing can change the relevance of total and average cost for the consumer and that they can both be important. Choosing the unit of interest for average cost is category dependent (Prelec and Loewenstein, 1998). For example in metro commuting the smallest unit of interest can be one day or a single trip. Aggregation across units can also be done in different ways: across a set number of product units (metro trips) or a set time period (one month). Note that average cost is not necessarily equal to the marginal cost – the cost of an additional unit consumed.

Sterman (1989) defines a variable to be important (salient), when individuals respond to changes in the level of that specific variable. When comparing importance of two cost types we need to define the response (dependent) variable. The response variables of interest in this paper are consumer judgments and decision making (e.g., likelihood to purchase. The cost type that individuals respond more to - in regards to chosen dependent variable - is the more important one. In this paper it is proposed that payment mechanism influences which of the above mentioned types of cost (average, total) is more important.

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