This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: Paying a steeper price for a subscription service can trigger a familiar impulse: You want to get your money's worth. For companies selling AI tools, cloud computing and other digital services, that can complicate a basic pricing strategy.
Raising prices may keep some customers from signing up, but those who do pay may be motivated to use the service more. New research from Texas A&M University examines what those competing effects mean for companies trying to manage demand through pricing, particularly for digital services where additional usage carries real costs. "These high prices can actually have a double-edged sword effect, where people say, 'We paid a lot, so let's just get our money's worth and use it more,'" said Dr.
Rajiv Mukherjee, a professor at Texas A&M's Mays Business School. The study, published in Production and Operations Management, was conducted with Sreekumar Bhaskaran of Southern Methodist University and Sanjiv Erat of the University of California San Diego. Companies have traditionally used price as one way to manage congestion.
When demand for a service strains capacity, raising the price can reduce the number of customers willing to buy access—and in turn, reduce the number entering the system. But Mukherjee and his colleagues argue that this view can overlook what happens after someone pays. For prepaid and subscription services, customers don't just decide whether to buy access.
They also decide how much to use the service once they're in. The researchers developed an analytical model to examine both sides of demand: how many consumers purchase access to a service and how much each of those consumers subsequently uses it. A higher price can reduce the first while increasing the second.
The reason lies in a behavioral economics concept known as mental accounting. People tend to mentally track what they have spent against what they receive in return. Paying more upfront can create a greater incentive to consume enough of a service to feel the purchase was worthwhile.
Extract — continue reading at the source.
