Digital Pricing
A review of the academic literature
This is an edited version of Chapter 5. The price from my book Advanced Introduction to Digital Marketing (2022), UK: Edward Elgar. It reviews and synthesizes the academic literature (mainly from marketing, but also from associated fields) on pricing in digital contexts.
Pricing decisions are among the few marketing decisions that bring in revenue for the brand, and because price exerts greater leverage than other profit drivers like costs or sales revenue, even small price changes can impact profit significantly, for increases as well as decreases (Dholakia, 2017). For consumers, not only is the price a crucial variable during decision making, but it also affects other stages of the digital customer journey in the CCDM framework, acting variously as a form of knowledge, a signifier of value and cultural meaning, a conveyor of social identity, and a means to exert influence during the buying process (Dholakia, 2019). Digital technology affects all these price characteristics, making prices more accessible and therefore, potentially more transparent, cheaper to change, and therefore more dynamic and short-lived. It allows the implementation of digitally-centric pricing structures like subscriptions, metered pricing, and auctions and enables customers to play a greater role in determining the price. These and other impacts of digital technology on prices and pricing strategy have been studied extensively by marketing scholars and are considered in this chapter.
Price Dispersion and Price Transparency
From the early days of digital marketing, business scholars have cautioned that the abundant and easy availability of price information online would hurt the value of brands. By making prices and their inputs readily available to customers, the internet would reduce price dispersion (Brynjolfsson & Smith, 2000; Clay, Krishnan, & Wolfe, 2001; Pan, Ratchford, & Shankar, 2004) and increase price transparency (Sinha, 2000). These early discussions predicted that during the research, evaluation, and buying process, customers would give greater weight to the price than to other product attributes. They would compare prices across digital channels, choose the lowest-priced seller, leading to price premium and margin erosion even for strong brands (Bakos, 1997; Sinha, 2000; Tang & Xing, 2001).
Two decades on, these predictions, by and large, have not been fulfilled. Debates still rage on about price dispersion and price transparency, but our understanding still remains incomplete and equivocal regarding the terminology (for example, is it “cost transparency” or “price transparency”?), the concept definitions, and the explanations for such things as why price dispersion has not declined (e.g., Zhuang et al., 2018) and whether price transparency is good or bad for customers and businesses (e.g., Hanna, Lemon, & Smith, 2018).
Price dispersion in digital marketing
Although it doesn’t capture price levels, price dispersion is theoretically and practically important because it affects customer and managerial decisions. Price dispersion is defined as “the distribution of prices (such as range and standard deviation) of an item with the same measured characteristics across sellers of the item at a given point in time” (Pan, et al., 2004, p. 117). Simply put, it is the range of asked-for prices for the same branded product in different digital and physical channels where it is available for purchase (Clemons, Han, & Hitt, 2002).
Price dispersion influences what customers consider to be a reasonable range of prices for a product (Dholakia, 2017), and it affects customers’ evaluation of prices, their search behavior to find better prices, and even their bidding behavior in online auctions (Andre et al. 2021), all of which impact the quality of the buying decision and post purchase outcomes for customers. On the managerial side, price dispersion affects the pricing strategies adopted by managers. When price dispersion is high, retailers have more flexibility. They can set and change prices within a wider range and run deeper promotions or take substantial price increases. In a low price dispersion setting, they are compelled to stay within the confines of the narrow range. However, note that if a retailer deliberately decides to set a price outside the existing range, in theory, it will simply increase the value of dispersion, and the outlier price will stand out (positively if it’s a low price, and negatively if it’s a high price; Janiszewski & Lichtenstein, 2018).
Why online price dispersion is high
Not only have early forecasts that price dispersion would decline as digital channels were widely adopted not panned out (Bakos, 1997), but many studies, including large-scale ones involving millions of price observations have found that online price dispersion is higher than before (e.g., Baye, Morgan, & Scholten, 2004; Brynjolfsson & Smith, 2000; Clay et al., 2001; Degeratu, Ramaswamy, & Wu, 2000; see Pan et al., 2004 for a review). Even many retailers who sell the same item through physical and digital channels don’t always quote the same price (Cavallo, 2017). There are many reasons for this. Here, I will cover three significant reasons.
1) Consumer decisions are multi-dimensional. Consumers use other product attributes beyond price to make buying decisions (Lee et al., 2018). When researching and buying online, non-price attributes such as factual information may become more significant as may brand knowledge (Degeratu, et al., 2000). Relatedly, many online shoppers care about factors such as the potential for fraud and concerns about storing one’s private information (the “worry” state in the CCDM framework). They are willing to pay more to retailers they perceive as more secure (Zhuang et al., 2018). Existing brand loyalty also factors into buying decisions as does brand preference (Danaher, Wilson, & Davis, 2003). Simply put, even with readily available prices, differentiation and branding matters to customers, and in many cases, it matters even more than before because of higher and multi-faceted risk perceptions (Clemons et al., 2002).
2) Managers use behavioral pricing strategies to disguise total prices. In many settings, because of various disguising methods, customers or competitors find it difficult to learn and use total prices in their decision calculus (Baye, et al., 2004). They may charge separately for shipping an item or unbundle their offering and partition prices in any number of creative ways (e.g., Xia & Monroe, 2004) or they may offer unique products with minor variations through each channel, making it difficult to compare prices (e.g., Lee, 2015) or they may reduce quantity in their packages or degrade service quality to disguise price increases. These and other pricing strategies make it difficult for customers to evaluate the level of price dispersion and use it readily for buying or price determination decisions (Baye et al., 2004; Hanna, et al., 2018). Consequently, the concept of price dispersion itself loses meaning.
3) Customers lack knowledge of actual price dispersion. Just because prices are readily available does not mean consumers know the entire range of available prices or form an accurate estimate of price dispersion (Janiszewski & Lichtenstein, 1999; Hanna et al., 2018). Consumer perceptions of price dispersion are distorted by contextual effects, so that there is a gap between actual and perceived dispersion. In an influential paper, Janiszewski and Lichtenstein (2018) point out that contextual changes can change the range of prices deemed acceptable, which in turn affects consumers’ assessment of a particular price’s attractiveness.
In one recent study, Andre, Reinholtz and De Langhe (2021) found evidence of dispersion spillover, the phenomenon where consumers overestimated price dispersion in a category after they had encountered another category where dispersion was higher, a classic carryover effect that is also seen in other domains of consumer perception. These types of effects will dilute the effects of actual price dispersion on consequential outcomes, reducing the need for managers to maintain a narrow price dispersion, or indeed worry about dispersion at all. The issue of how price dispersion perceptions are affected by a high frequency of price changes, also facilitated by digital technology, is significant and will be brought up later in this chapter.
Price transparency in digital marketing
Price transparency affects consumer perceptions of price dispersion. But what exactly is price transparency? There are two distinct conceptualizations relevant to digital marketing. Soh, Markus, and Goh (2006) define price transparency as “the degree to which market participants know the prevailing prices and characteristics or attributes of goods or services on offer” (p. 706). Similarly, Hanna, Lemon, and Smith (2019) define it as “the extent to which information about prices is available to buyers that organizes, explains, clarifies, or projects the contextual direction and/or rationale for the seller’s pricing” (p. 228). Both these are exemplars of what I call availability-based price transparency, defined as the degree to which prices are readily available to current and potential customers, and others such as suppliers, channel partners, and competitors in the marketplace.
In contrast, Atefi and colleagues (2020) conceive of price transparency as the voluntary disclosure of cost (not price) information by the salesperson at the front end of a negotiation, and Buell (2019) sees it as giving customers a “behind-the-curtains” perspective through information about costs, markups, and the processes involved in producing a product or service. These conceptualizations are exemplars of what I call disclosure-based price transparency, defined as the degree to which some or all costs and pricing performance variables (e.g., markup factors, margins, unit sales, and revenue) are disclosed to current and potential customers, and others such as suppliers, channel partners, and competitors in the marketplace. The widespread adoption of digital channels has increased both availability-based and disclosure-based price transparency, but marketers still have a fair degree of control over how transparent they want their prices to be. There are also other nuanced differences between the two types of price transparency that are worth exploring.
Availability-based price transparency
Many online retailers, car dealers, hotels, and airlines readily display prices on their websites, apps, and other digital channels. These are examples of “high” price availability (see Figure 5.1 below) meaning that prices are readily available to customers at every stage in their decision journey, even when they are exploring or browsing, without purchase intent. It also means that prices can be readily accessed by competitors, investors, regulators, and everyone else. Figure 1 shows the continuum of the degree of price availability by industry.
In many industries like high-end real estate, medical devices, and specialty chemicals, prices aren’t revealed until the prospect provides evidence of their interest and wherewithal to purchase. In US hospitals, patients never learn the prices until they are handed the bill upon discharge (Kliff & Katz, 2021). This is also true of digital auctions. Because of their participatory and dynamic nature, establishing the final price is coincident with purchase (Cheema et al., 2005). The related issues of how often to change prices and how quickly to make customers aware of the new prices are also significant managerial concerns in digital settings (although they have received relatively little research attention thus far). Reducing availability-based price transparency has a number of significant benefits for sellers:
1) Withholding prices confers pricing power. Many managers view withholding prices as a competitive advantage and a powerful way to maintain pricing power and strength during customer negotiations. Reducing price availability affords greater flexibility and empowers the seller to make customized offers that are dependent on customer valuation (Pauly & Burns, 2008) and other contextual factors. Such a perspective views the customer as an adversary, to be controlled or even hoodwinked.
2) Low price availability hides the seller’s pricing illogic. Many US hospitals do not make their prices available online even though it is mandated by federal law. Consequently, they are able to charge different (inflated) amounts for the same basic medical procedures and hide the lack of logic and the inconsistencies behind their prices (Kliff & Katz, 2021). This practice also merits further research attention.
3) Withholding prices raises customer commitment to completing the buying journey. For abstract products like artwork, many online galleries ask interested customers to inquire or call for prices. This shrouding has a purely psychological motive, to increase the customer’s commitment to the item by making them act (Staw, 1981). A small action, the inquiry, increases the chances of a larger subsequent action, buying the artwork (Burger, 1999).
4) A “price available upon request” notice generates an aura of exclusivity and status. Sellers of high-priced luxury online listings often post that the price is only available upon request. In addition to dissuading casual browsers, the notice serves a branding purpose. It signals that the property is high-priced and unique. Combined with the exclusivity, uniqueness, and prestige, the lack of price transparency may also be indicative of the value uncertainty in the seller’s mind (Clarke, 2018).
Disclosure-based price transparency.
The disclosure of costs, markup factors, and margins by companies are rooted in the philosophy of radical corporate transparency. The fundamental principle behind the philosophy is alluring, an honest and complete openness in business operations, both internally with employees and externally with everyone in the wider world (e.g., Goleman, 2009; Heemsbergen, 2016). The openness manifests in different ways depending on the organizational context; but in the pricing context, the openness is about costs and other pricing inputs facilitated by digital technologies (Dholakia, 2017).
Disclosure-based price transparency is driven by at least two different managerial motivations. First, few business variables are as informative as costs for decoding and diagnosing business impacts, not only for consumers but also for other vulnerable constituents. For example, knowing the cost of labor in making a consumer product provides information about whether the workers who made the product are being paid a fair wage (Andorfer & Liebe, 2012), and ingredient costs shed light into whether the company is compensating its suppliers and their workers fairly, a relevant issue in many global supply chains with an asymmetry between the power of buyers (multinational corporations) and sellers (impoverished farmers, developing country entrepreneurs, manufacturers’ workers etc.; Leonard, 2010). An example of a labor cost transparency movement is the #LowestWageChallenge instituted by Able, a US-based fashion brand that makes and sells jewelry and apparel. The seller publishes the lowest wages it pays its workers and challenges others in the industry to do the same. The brand voluntarily uses a digitally-disseminated reporting system providing the information in a pithy format resembling a nutrition facts label (Chong, 2019).
A second, entirely different motivation is to use disclosure-based price transparency as the cornerstone of a company’s branding strategy, something particularly relevant for digital branding. For example, the online fashion retailer Everlane makes cost disclosure a core part of their brand identity through its use and implementation of its “radical transparency” value proposition (Dholakia, 2017), and the US-based Southwest Airlines uses “transfarency” as a key differentiator. Everland purports to be concerned with the welfare of all involved, its suppliers, workers, and customers. For every item it sells, the company discloses its specific variable costs such as materials, hardware, labor, duties, and transportation under the concept of “transparent pricing.”
Disclosure-based price transparency is an intriguing idea with the potential to fit, ideologically and economically, into a company’s digital marketing activities. For consumers, while this type of transparency is inherently appealing, it is also difficult to understand and make sense of. It needs more development and a detailed explanation, often beyond the scope of branded communications, to be practical. At is stands, it is a managerial ideology, often initiated by company founders enamored with virtue signaling or social activism, without really caring much about their customers’ reactions to these disclosures. Much remains to be studied and known about disclosure-based price transparency, its promise, and its pitfalls.
Participative Pricing
In hospitality, apparel, consumer durables, and many other industries, fixed prices are ubiquitous. Fixed prices are an outgrowth of nineteenth century shifts towards standardization of quality and scaling up of service capacity by retailers (Morris, 2012). Although fixed prices provide certainty to consumers, their main downside is inflexibility. Fixed prices reduce consumer participation to the single binary “buy” or “not buy” decision, and many marketing scholars take this constraint for granted in their research.
Digital technologies are loosening this constraint. With the speed and low cost of interactivity, synchronicity, and the use of algorithms in pricing, some based on artificial intelligence, and others based on simpler rules-based execution, prices are again becoming fluid in settings where they used to be fixed (Calvano, et al., 2020; Dholakia, 2019; Spann, et al., 2017). As Dholakia (2019) observes, “Technology-driven pricing and changing cultural norms both favor the eventual abandonment of stable, fixed prices, and the adoption of negotiated prices.” (p. 142).
Participative pricing refers to mechanisms in which prices are fluid and customers play a significant role in establishing the price (Bertini & Koeningsberg, 2014). Not every participative pricing method requires digital technologies, but their popularity is increasing as consumer empowerment because of digital technologies percolates into the price-setting process (see Bertini & Koeningsberg, 2014, for a review). Participative pricing is an effective strategy for products and services with significant hedonic or temporal value and where customers vary how much they value the offering (Dholakia, 2019). Figure 5.2 shows the different participative pricing mechanisms categorized by degree of customer participation and the need for digital affordances for their deployment.
In the bottom left quadrant of the figure above are fixed pricing and limited-time offers that do not necessarily require digital technologies and in which customers play no role at all in setting prices. The only customer decision is whether to buy the item at the quoted price. (For limited-time offers, they can choose to buy at the regular price or wait for the sale price). In the top left quadrant are customized pricing, variable pricing, and dynamic pricing, which require digital technologies such as extensive customer and market data, software-based algorithms, statistical modeling, and marketing analytics to measure pricing success.
Customized pricing involves making unique price offers to customers at scale based on analyzing detailed information to estimate their preferences and economic valuation (Valentino-DeVries, et al., 2012). Figure 5.2 also distinguishes between two forms of frequently changing prices, variable pricing in which the seller may change price frequently simply because they can do so or by using simple algorithms (e.g., respond to a competitor’s price change in a certain rule-based way), and dynamic pricing, which specifically takes customer demand and supply into account so that prices change as a function of customer buying behavior (see Kannan & Kopalle, 2001, for a different perspective, suggesting that any pricing strategy where prices vary should be called “dynamic”). For all three pricing methods, customers have slightly more choice than the bottom-left-quadrant methods because they can select from a wider range of prices, but they don’t actively participate in determining price.
The bottom right quadrant of Figure 5.2 contains methods which do not require digital technologies but involve a high degree of customer participation in setting prices. Bargaining/ haggling (in B2C settings) and negotiation (in B2B settings), physical auctions, and Pay What You Want pricing with or without constrained choices all require customers to take the lead in establishing prices (Kim, Natter, & Spann, 2014). These mechanisms are supported and have been popularized by digital technology. Finally, the top right quadrant contains digital auctions and Name Your Own Price, all high consumer participation methods in which digital technology is critical. The main pricing mechanisms shown in Figure 5.2 are considered next in greater detail. (Note that there is a vast literature on physical and digital auctions both from economic and psychological perspectives, but that is omitted here because of space constraints; see Cheema et al., 2005, and Haruvy & Popkowski Leszczyk, 2010, for reviews).
Variable and Dynamic Pricing
Despite the distinction made in Figure 5.2, the terms “variable pricing” and “dynamic pricing” are used interchangeably by most marketing scholars. Both approaches are consolidated under their common characteristic – prices change frequently. The most powerful influence of digital technology on pricing strategy is to enable frequent price changes, whether it’s by taking demand into account (dynamic) or relying on other factors (variable). Early on, scholars noted that the internet reduced menu costs, making it easier to change prices by smaller amounts and more frequently (e.g., Brynjolfsson & Smith, 2000), leading to reduced price rigidity. Early studies, however, found online prices to be quite rigid. In one study from 2003-04, the authors found that Amazon changed prices of its book after more than seven months on average, leading them to conclude “the prices on the internet appear to be more rigid than we ever might have guessed” (Bergen, Kauffman, & Lee, 2005, p. 79). Recent studies have found that price rigidity has declined considerably. In a study of Amazon Fresh (grocery) products, for instance, Hillen and Fedoseeva (2021) found that prices change frequently and by small amounts, every 18 days on average. Anecdotal reports indicate that some products sold by Amazon and other online retailers change even more frequently, even several times in a single day in some cases (Angwin & Mattioli, 2012).
The adoption of price optimization software is another contributor to increasing frequency of price changes (Pekgün, et al., 2013). Short-duration price promotions, flash sales, and daily deals are all popular digital pricing methods and have the potential to maintain customers’ trust with the brand when compared to varying posted prices (Kannan & Kopalle, 2001). Many sellers view frequent price changes as a way of increasing repeat customer visits. And finally, using the logic that only the most price-sensitive customers will persevere, constant price changes can be seen as a way to offer discounts selectively, increase customer engagement, and protect their profit margins (Dholakia, 2019). Surge pricing and other demand-based pricing methods have been widely adopted in many industries as a way to implement market-driven fairness (Diakopoulos, 2015), although many customers still consider them to be unfair (Dholakia, 2015).
Prices changes have also become more frequent in B2B industries, through methods like list price optimization, where the pricing decision takes a broader set of customer characteristics and decision variables such as discretionary discounts into account than before and explicitly considers the interactions in the product line, channel costs and outcomes, past pricing performance, etc. (e.g., Rama, et al., 2016). B2B companies that used to update prices annually now change prices on a quarterly or monthly basis. In both B2B and B2C settings, research shows that frequently changing prices can have significant adverse effects on customer behavior, four of which are briefly described here.
1) Difficulty in forming a reference price. When consumers purchase the same items, they become knowledgeable about prices over time (Park, Mothersbaugh, & Feick, 1994), learning every time they encounter the price during their decision journeys, and consequently, they form a reference price or range. The process is disrupted when a product’s price changes frequently and fluctuates over a wide range. Many consumers find it hard to form a stable and coherent reference price because of the price volatility (Kannan & Kopalle, 2001). Perceptions of price transparency diminish even if prices are readily available because of the fluctuation.
2) Increased complexity of buying decision. Under normal circumstances, consumers use simple decision heuristics for repeat and low-involvement purchases, based on the reference price or acceptable price range. When prices change frequently, however, this process becomes infinitely more complex for consumers (Jacobson & Obermiller, 1990), involving lengthier search involving more options, having to make use of price comparison and price tracking apps or sites, and so on.
3) Impetus to delay purchase. In a complex buying situation, consumers shift into a wait-and-see mindset, not knowing when to buy. Even when the item’s price goes down, they may wait to see if it will go down further, missing out on a good deal (Greenleaf & Lehmann, 1995). The reaction of the coat shopper is illustrative: “Take Aishia Senior, who recently watched the price on a coat she wanted rise and fall several times between $110 and $139 in a span of six hours on Amazon.com. She was so frustrated by the price fluctuations that she ended up not buying the coat on the site at all. “It's definitely annoying,” said Senior, who lives in New Haven, Connecticut. “What exactly is making it go up and down?”” (D’Innocenzio, 2014)
4) Greater weight given to price. Given the proclivity to attend to stimuli that change over stable stimuli, another consequence of frequently changing prices is that it shifts the consumer’s attention away from the functional and experiential features of the product to its price (Bertini & Wathieu, 2010; Shoemaker, 1996). This leads to a preference for lower-quality items and post-purchase dissatisfaction because of unmet expectations.
In a nutshell, even though digital technology allows frequent price changes, the extant behavioral research suggests that managers should be circumspect. More research is needed on developing a theoretical framework along with prescriptive guidelines regarding the optimal frequency of price changes for a particular industry, or in a particular context.
Name Your Own Price (NYOP) Pricing
Another complex, digitally-driven participative pricing method is NYOP pricing in which the seller chooses the lowest price they are willing to accept and rejects the buyer’s offer if it falls below this threshold. The seller also withholds information about the specific brand or product until after purchase to earn a higher profit. Although NYOP pricing requires customer participation and gives them control over prices, it is far less transparent than PWYW pricing (discussed next) for at least two reasons. First, the seller does not provide an initial offer to start the negotiation, although it may provide a high anchor such as the item’s regular price. Because of this, there is no explicit starting point the customer can use to begin the bidding process. Second, customers do not know the specific brand they will receive until after they have purchased and paid for the product (Chen et al., 2014), which may be unacceptable for consumers with a strong brand preference.
Despite its relative complexity, NYOP pricing can be an advantageous pricing strategy for the firm. First, because it is rare, it can be an effective approach to differentiate a brand, especially for startups in crowded markets. As an example, when US-based online retailer Garmentory launched its operations, it sold all its merchandise from small fashion boutiques only using NYOP pricing to attract attention and to stand out. Second, because the prices and offers are relatively hidden, researchers have found that consumers incur substantial frictional costs when submitting incremental bids. In one German study, the frictional costs per bid ranged from 3.5 Euros for purchasing an MP3 player to 6.1 Euros for a PDA (Hann & Terwiesch, 2003). Third, NYOP pricing provides an online channel to sell excess capacity or outdated inventory and earn reasonable revenue from these extra sales without hurting the core brand (Dholakia, 2019).
Even though it empowers consumers, participation in NYOP requires effort. As noted earlier, key attributes of the purchase choice such as brand is taken away from consumers in some implementations, reducing its appeal for brand-conscious consumers. Another concern is that consumers can collude and exploit a seller’s NYOP pricing process by exchanging information about bids and outcomes with each other or deploy coordinated bids to discover price thresholds and the lowest successful bid prices (Levina et al., 2015). Although it has been periodically implemented since the early days of digital marketing, NYOP remains a niche participative pricing method with more potential than success so far. For academic researchers, there are many opportunities to understand this method more, and provide guidance regarding how to use this method successfully in digital settings.
Pay What You Want (PWYW) Pricing
The most extreme form of participative pricing is to put the customer in the driver’s seat by letting them decide how much they want to pay for the product. When using PWYW pricing, the seller offers the product, and if it has an experiential component like software or food, lets the buyer try or consume it, then pay their desired price. For instance, a restaurant that uses PWYW pricing will let the customer decide how much they want to pay after their meal. The customer can choose to pay whatever they wish, including nothing at all (Kim, et al., 2009; Viglia, et al., 2019). In some versions of PWYW pricing, the seller provides a suggested price to the customer to serve as a reference price (DePillis, 2013). In other versions, the PWYW offer may be qualified by a minimum amount, or by choosing from one of several price options (Schlossberg, 2015). As shown in Figure 5.2, PWYW pricing does not require digital technologies, but the empowerment stemming from digital technologies has made customers more receptive to participating actively in these types of mechanisms, and additionally, in many cases, they are implemented using digital technologies (Spann et al., 2017).
Many companies use PWYW pricing over lengthy periods and are able to remain profitable (Gneezy, et al., 2012). In other words, researchers argue that PWYW is a sustainable pricing strategy. Gneezy and colleagues (2012) concluded that “people choose to pay because they feel that paying for a good or service received is the right thing to do. Thus, choosing to pay serves to maintain an individual’s positive self-image.” Other studies have also found that when businesses implement PWYW pricing, a vast majority of consumers pay for their purchases (Reiner & Traxler, 2012), and the benefits are even stronger when the PWYW component of the price involves giving money to charity (Gneezy et al., 2010). Compared with other promotional offers like free samples and discounts, PWYW offers for men’s razors and portrait photographic prints generated more excitement, trial rates, and word-of-mouth behavior, and was more profitable for the seller (Kim, Natter, & Spann, 2014).
Counterintuitively, Gneezy et al. (2012) also find that PWYW pricing can backfire in that many consumers choose not to buy the product when it uses PWYW pricing relative to fixed pricing (Gneezy, et al., 2012). This is because many consumers may find it effortful to ascertain a fair price for the purchase, and also be concerned about how they’ll feel about themselves if they underpay. Furthermore, Viglia and colleagues (2019) find that in restaurants, paying after consumption increases prices paid because consumers feel more certain about the product’s quality. This corpus of findings suggests that taking on a more decisive role in setting price such as when deciding how much they should pay takes a toll consumers. Many customers would rather not participate in setting price, suggesting that more research is needed to understand which contexts support PWYW specifically, and participative pricing methods more generally, and which companies may use innovative pricing mechanisms effectively and to what end.
Digital Payments
A significant issue on the periphery of pricing research is the effect of payment mode, i.e., the method customers use to pay the asking price, on buying behavior. A common dichotomy in the literature is paying with cash versus using a digital method like a credit card, Paypal, Venmo, Apple Pay, and more recently, cryptocurrency. The fact that payment mode matters is well-established in the literature. A consistent finding dating back to the 1970s is that credit cards encourage customer spending relative to paying with cash; studies have found that those who own more credit cards make larger purchases during visits to the department store (Hirschman, 1979), those who pay with credit cards (vs. cash) leave larger tips in restaurants (Feinberg, 1986), are more likely to buy additional discretionary items (Soman, 2001), and have significantly higher willingness-to-pay for high-ticket items (Prelec & Simester, 2001). More recent research has found that paying with a digital method attenuates the endowment effect by increasing buyers’ willingness-to-pay (Huang & Savary, 2018).
On the basis of these and other studies, we can surmise that paying with a digital method (relative to cash or check) diminishes the physical reality of spending money, lowers payment transparency, makes money constraints less accessible, and reduces the salience and the pain of payment, and therefore makes consumers less cautious in their buying and spending decisions (Soman, 2001; 2003; Prelec & Simester, 2001; Raghubir & Srivastava, 2008). The same idea applies to renewing a subscription after it has expired, making regular payments for discretionary services like gym memberships, streaming services, and so on. Automating payment with a digital payment method reduces the salience and pain associated with it, reducing friction, and encouraging the status quo (Deighton, 2021).
Intriguingly, offering digital payment methods to customers may itself have branding value. For instance, recent research has found that the fact that a business accepts novel payment forms also matters to customer behavior in counterintuitive ways. In the study, service providers that accepted Venmo, the peer-to-peer digital payment method typically used by consumers to pay each other, were seen as warmer and therefore less competent relative to those that did not, leading to negative customer evaluations (Huang, et al., 2020). Instead of helping, accepting Venmo hurt the service provider.
We are in relatively early stages of customer adoption of many innovative digital payment methods. For instance, many cryptocurrencies have exploded in value but are still not widely used to make purchases (Ip, 2021), and “Walk out shopping” where the check-out process is bypassed entirely by tracking customer purchases using in-store IoT including mobile apps, cameras, sensors, digital payment, and deep learning, is only beginning to be introduced in retail stores (Herrera & Tilley, 2020). As these and other novel digital payment forms become common, numerous research questions about their value, limitations, and ramifications will require significant scholarly attention.
In conclusion, a persistent tension has permeated throughout this chapter between characteristics of digitally-enabled pricing strategies that provide flexibility and convenience to customers and empower them to participate in the price-determination process on the one hand, and the characteristics of these same strategies that disrupt customer learning, evaluating and deciding processes, encourage imprudent and unconsidered buying actions, and cause worry because of the loss of privacy and power in exchange relationships with individual sellers and digital platforms. As digitally-enabled pricing strategies continue to evolve, this tension is only going to become more significant and take center stage (Huberman, 2021).