Gia Nardini

New research from two marketing professors at the University of Denver’s Daniels College of Business finds that when consumers prepay for a service, they’re more likely to indulge, often spending even more.

“Since a decision maker has an internal need to validate prior investments to avoid considering them as wasteful, our experiments show that consumers choose more indulgent options to help rectify the pain of payment,” say study authors Ali Besharat and Gia Nardini.

Assistant Professors Besharat and Nardini had their article, “When indulgence gets the best of you: Unexpected consequences of prepayment,” recently published in the Journal of Business Research.

Ali Besharat

The two ran a field study and two experiments to test their theory. In the field study, 86 consumers paid $12 up front for an all-you-can-eat lunch buffet. Ninety-seven other customers paid the fee after they were done eating. All of the customers had the choices of healthy (e.g., water, unsweetened iced tea or fruit salad) or indulgent (e.g., sugary soft drinks, brownies or ice cream) options for drinks and desserts. Making a prepayment at the restaurant significantly increased the choice of indulgent drinks and also increased the choice of indulgent desserts.

In Experiment 1, 138 participants took an internet survey. The scenario asked participants to imagine that they are spending a day at an event that featured international food with a variety of tasty appetizers and refreshing beverages. Participants were randomly assigned one of three conditions:

  • In the no payment condition, participants learned that they will be admitted to this event free of charge.
  • In the prepayment condition, participants were told that they will pay $10 to be admitted to this event, but they will leave with no charge.
  • Participants in the post payment condition were informed that they will be admitted with no charge, but they will pay $10 before they exit the event.

Then, people were allowed to buy snacks from 16 options. Results showed that on average, participants in the prepayment condition had a significantly higher indulgent behavior score (i.e., chose more indulgent than healthy snacks) than did participants in the no payment condition.

In Experiment 2, 167 participants were randomly assigned to one of four conditions in an online survey. They were told to imagine that they were going to a popular bar during Oktoberfest, an international beer festival. They learned that due to high demand and a live band performance, they had to pay a $12 admission fee or wait in line for 50 minutes to enter the bar. The prepayment information was conveyed such that it gave participants the impression that prepayment was either anticipated (e.g., expected and not surprising) or unanticipated (e.g., not expected and surprising).

Then, participants imagined that they entered the bar and decided to order food by writing down the name of their desired appetizer and indicated how much they were willing to spend.

“In line with prior research, people felt compelled to justify their initial payment by paying more for food and choosing more indulgent options, but only when they prepaid in the form of money (i.e., $12 admission fee) and not when they prepaid in the form of time (i.e., a 50-minute wait),” the authors say.

Since our results suggest that escalation of commitment justifies indulgent decisions, there are some important lessons for marketers.

“Marketers may be wise to charge customers up front or participate in online daily coupons with high acquisition costs (such as Groupon) to target hedonic (indulgent) services,” the researchers say. “Given that consumers who prepay are likely to spend more, especially on indulgent options, charging customers in advance and using online daily coupons should bode well for firms’ bottom lines.”

Read the full study.

About the authors:
Ali Besharat is an assistant professor in the Department of Marketing at the Daniels College of Business, University of Denver. His areas of research interest include consumer behavior; behavioral judgment and decision making; and marketing communications and branding. Read more.

Gia Nardini is an assistant professor in the Department of Marketing at the Daniels College of Business, University of Denver. Her research focuses on consumer behavior in the domains of consumption experiences and decision making. Read more.