Customers prefer to pay more in advance to ensure that they will receive refunds later on

A new study by WHU – Otto Beisheim School of Management, in cooperation with Goethe University Frankfurt and the University of Toronto Rotman School of Management, has found that both service companies and their customers benefit from a moderate increase in monthly fees.

Monthly uniform advance payments are popular not only with customers but also with service companies, such as providers of electricity or gas. Customers benefit from predictability of monthly costs, and service companies receive payments earlier. In three empirical studies, an international team of researchers evaluated survey and billing data for more than 20,000 German home electricity customers with an eye to the customers' reactions to refunds and extra payments.

According to the study, customers who receive a refund pay less attention to the monthly fee, recommend their provider more often and change tariffs less frequently than customers who must pay back payments at the end of the year.

“At first glance, it seems irrational that customers who grant their provider a free loan through higher monthly fees would be happier than they would be if they had lower monthly charges and an additional payment at the end,” WHU Professor Christian Schlereth explains.

As a result, service companies are well-advised to enact moderate fee hikes so that more customers can receive a refund at year's end. One requirement here, however, is to make sure that the refund is not too high. “For the service companies that cooperated with us in our research, for instance, we recommend increasing the fee by 5 percent; this translates into additional charges of just €3.45 per month for the average household.

The consequence would be that not 50 percent but 70 percent of customers would receive a refund, which would reduce the churn rate by around 8 percent,” Schlereth points out. “A service company is even more successful, though, if it leaves a modest fee increase up to customers' discretion, since a majority of customers, but not all, prefer the refund.”

Increasing monthly charges can be useful not only for service companies, however. Building landlords can also benefit when they collect advance payments for shared services: tenants, too, are often happier to receive a refund, whereas they are likely to ask for a complete disclosure of utility costs when they are required to make an extra payment at year’s end.

The study was conducted by Christian Schlereth of WHU – Otto Beisheim School of Management; Fabian Schulz and Bernd Skiera (both of Goethe University Frankfurt); and Nina Mazar of the University of Toronto Rotman School of Management. The study will be published in the upcoming September issue of the International Journal of Research in Marketing.