Consumers have myriad options for payment. Formats with higher transparency (e.g., cash) come with higher pain of payment, so buyers paying with such formats tend to spend less on hedonic products bought for pleasure rather than function ). To encourage purchase of hedonic products, retailers could offer payment through less transparent formats (e.g., credit cards or points), allow accumulation of the points/vouchers, and offer more hedonic products for redemption.
Until a few years ago, cash was the primary mode of payment at most retail outlets. Credit cards were accepted as well but at fewer locations. Today, payment options for consumers have exploded. Apart from cash and credit cards, consumers can also choose between mobile apps to gift certificates and membership points. It is important for retailers to understand how the various payment formats influence buyer decision making and to use that understanding to devise optimal pricing strategies. A study investigates this issue and attempts to answer the question: How can retailers choose the best payment formats to encourage the consumption of hedonic products?
The study found that transparency of payment formats plays an important role in buyer
decision making, especially for hedonic products (products that are bought for pleasure or experience rather than functionality, e.g., holidays, perfume, or games). Transparency of payment formats refers to how physically tangible the amount to be paid and the mode of payment are. For example, cash has the highest transparency because we can see the money and have to manually count out the amount to be paid. Credit cards have lower transparency because though we see the card physically, the actual payment is not visible. Electronic and mobile payment formats have even less transparency than credit cards.
According to the study, buyers who pay with more transparent formats, e.g., cash, tend to spend less than buyers who pay with less transparent formats. They also assign lower budgets and are less likely to choose hedonic products. Interestingly, this behaviour is even more pronounced when the points/vouchers are earned rather than purchased. This behaviour originates from a higher pain of payment associated with transparent payment formats and also with buying hedonic products.
To read more about pain of payment and association of payment formats with types of goods, read How mobile payments affect consumer behaviour
The pain of payment is the negative emotion that buyers feel when paying for purchases. Buyers tend to feel higher pain of payment when paying with cash because they have to
hand over the actual amount after counting it out. Similarly, they feel higher pain of payment for hedonic goods because their benefits are harder to quantify. For example, it is easier to justify the benefits of a pair of glasses than to justify the benefits of a branded handbag. Therefore, buyers paying with transparent formats tend to choose utilitarian goods (goods bought for functional and quantifiable benefits, e.g., groceries, clothes, or fuel) over hedonic ones. Even when they buy hedonic goods, they can hesitate to spend money on hedonic products.
This reluctance can be offset by paying through less transparent formats. Because the less
transparent payment methods dissociate the purchase and the actual money transfer to an extent, customers feel lower pain when purchasing through such formats. Retailers can take advantage of this behavioural phenomenon to offer less transparent formats of payment for hedonic goods. They can offer various modes like bonus/membership points, gift certificates/vouchers, and prepaid/credit cards for hedonic products.
Retailers can also offer points or cashback with purchases that can be redeemed at a later
date. Accumulated points help to reduce the pain of payment further, encouraging buyers to opt for hedonic products. This system of points can be combined with the offering of more hedonic products for redemption. For instance, instead of allowing customers to redeem points on groceries, clothing, or home décor, retailers can allow them to redeem the points on these plus cosmetics, jewellery, or gaming systems.
Understanding the importance of pain of payment vis-à-vis both formats of payment and types of goods and designing pricing and payment strategies based on this understanding, retailers can boost the sale of hedonic products more easily.
You can read more about using cashbacks to increase sales here: Cashbacks: benefit or burden
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