Consumers often prefer flat-rate pricing over metered pricing due to the psychological discomfort associated with watching costs increase with each unit of consumption, known as the “taxi-meter effect.” This preference is not solely based on the economic benefits of certainty and convenience or an overestimation of usage but stems from a desire to avoid the anxiety of incremental charges. Studies, including those by Nobel Prize-winning economist Daniel L. McFadden and research by Anja Lambrecht, have demonstrated this bias across different industries, from telecommunications to retail banking. The discomfort applies even to experiences consumers do not enjoy, indicating a deep-rooted psychological aversion to metered pricing. This insight suggests that businesses aiming for transparency and high usage might consider designing pricing schemes that offer entry-point metered rates alongside flat-rate options for more loyal customers to encourage usage without the deterrent effect of metered charges. Some businesses, like car-sharing services, might find offering a flat rate challenging but can mitigate the taxi-meter effect by reframing their pricing presentation to reduce consumer anxiety over incremental costs.
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