How Pay Plans Impact Profits

Consumers like refunds—so much so that if companies don’t structure certain payment plans carefully, they could end up losing business.
Consumers like refunds—so much so that if companies don’t structure certain payment plans carefully, they could end up losing business. Three researchers studied the attitudes and behaviors of home electricity customers in Germany, where utility com­panies use equal billing exclusively. Under “equal billing” or “budget billing” pro­grams, customers pay the same amount for service each month, avoiding the surprise of a large bill during months of peak use. At the end of the year, utility companies reconcile what customers paid with their actual usage, leading either to a customer refund for overpayment or a bill for the remaining balance.

The researchers found that customers who received refunds were more willing to recommend the company to friends, less focused on payment size, and less likely to switch providers than those who had to make an extra payment. That preference, however, was only up to a point. If refunds were too large, customers responded more negatively. An overly large refund made it more obvious that they had been overbilled.

These findings indicate that companies that offer equal billing might want to struc­ture those plans to ensure customers do not owe money at the end of the year. Otherwise, unfair as it may seem, those customers could take their business elsewhere.

“Advance Payment Systems: Paying Too Much Today and Being Satisfied Tomorrow” was co-authored by Fabian Schulz and Bernd Skiera of the Faculty of Business and Economics at Goethe University Frankfurt in Germany, Christian Schlereth of WHU– Otto Beisheim School of Management in Germany, and Nina Mažar of the University of Toronto’s Rotman School of Management in Ontario, Canada. The study appears in the September issue of the International Journal of Research in Marketing.