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Customers will pay more today if there’s payback later, shows equal billing study

May 7, 2015

TORONTO, ON – What’s not to like about get­ting a refund?

It’s a pos­si­bil­i­ty under equal billing plans, where con­sumers are charged the same amount every month for con­sump­tion-based ser­vices such as ener­gy or water. Those billings are lat­er rec­on­ciled with actu­al usage, usu­al­ly at the end of the year, lead­ing to either a refund for over­pay­ment, or an extra charge.

Con­sumers like the pre­dictabil­i­ty — no more shock­er whop­per bills for occa­sion­al usage spikes such as crank­ing the air con­di­tion­er dur­ing a heat­wave. Ser­vice providers like them too. They get mon­ey upfront, can low­er their oper­at­ing costs and face low­er risks of cus­tomers not pay­ing their bills.

But a study of the best ways to struc­ture equal billing plans says that smart com­pa­nies should set them up so that cus­tomers get mon­ey back at the end of the term. Not only do they think they pre­fer to pay a lit­tle more each month to make sure they get that refund lat­er but after hav­ing expe­ri­enced a refund they are more sat­is­fied and more loy­al.

It’s an irra­tional atti­tude for con­sumers to have but, “if com­pa­nies don’t con­sid­er it, they may end up los­ing cus­tomers, pri­mar­i­ly because com­pa­nies end up mak­ing their cus­tomers less hap­py than they could be,” says study co-author Nina Mažar, an asso­ciate pro­fes­sor of mar­ket­ing at the Uni­ver­si­ty of Toronto’s Rot­man School of Man­age­ment.

The team of researchers stud­ied the atti­tudes and actu­al behav­iours of home elec­tric­i­ty cus­tomers in Ger­many, where equal billing is used exclu­sive­ly. Besides pre­fer­ring high­er equal bills result­ing in a refund over low­er equal bills result­ing in an extra pay­ment at the year end, refund-cus­tomers were more will­ing to rec­om­mend the com­pa­ny to friends, were less focused on the size of their pay­ments and were less like­ly to switch providers than extra pay­ment-cus­tomers.

But the study also found you can have too much of a good thing.  Get­ting a sig­nif­i­cant­ly large refund led to less pos­i­tive con­sumer feel­ings, prob­a­bly because they fig­ured out that they were being con­sid­er­ably over­billed the rest of the year and could have used the mon­ey in more pro­duc­tive ways.

“It does­n’t real­ly make sense from a nor­ma­tive per­spec­tive to be hap­pi­er with a refund than an extra pay­ment sequence, yet peo­ple pre­fer to make this ‘finan­cial mis­take’ – at least with­in a range” says Prof. Mažar.

Com­pa­nies already offer­ing equal billing may want to con­sid­er small increas­es in month­ly billings to increase the chance of issu­ing a refund at the end of the pay peri­od, the paper sug­gests. They could also give cus­tomers the option of an increase.

The paper was co-writ­ten with researchers from Uni­ver­si­ty of Toronto’s part­ner uni­ver­si­ty the Goethe-Uni­ver­si­ty Frank­furt and from WHU — Otto Beisheim School of Man­age­ment. It is forth­com­ing in the upcom­ing Sep­tem­ber issue of the Inter­na­tion­al Jour­nal of Research in Mar­ket­ing.

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The Rot­man School of Man­age­ment is locat­ed in the heart of Canada’s com­mer­cial and cul­tur­al cap­i­tal and is part of the Uni­ver­si­ty of Toron­to, one of the world’s top 20 research uni­ver­si­ties. The Rot­man School fos­ters a new way to think that enables our grad­u­ates to tack­le today’s glob­al busi­ness chal­lenges.  For more infor­ma­tion, vis­


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Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
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