How pricing psychology help a public utility business
We’re in the public utility sector and a distributor of electric service in a southern Luzon province.
Question: We’re in the public utility sector and a distributor of electric service in a southern Luzon province. Our pricing is regulated and it has been and still is the object of just as much if not more public and media criticism as gasoline prices. This is in spite of several years now that we’ve patterned the presentation of our monthly billing to subscribers almost like the monthly billing of Manila Electric Co. (Meralco). That means our portion of the total amount due from a subscriber is as a distributor. That is nearly just half of the pricing from electricity generation.
We read your column last Friday telling your readers that taking account of the consumer pricing psychology can help with pricing concerns similar to ours. We discussed this in the office and none of us came out with a clear idea as to how exactly pricing psychology can help us manage better public criticism of our pricing. Please help us understand.
We realize that we’re just one public utility business. But your helping us will also benefit a whole lot of electricity consuming subscribers in this province. Think also of the rest of the country’s electric services providers and their millions of subscribers.
Answer: We have to say that you have a subtle but persuasive way of telling us to answer your request for help via our column instead of just a direct email response to you. Yes, we agree that helping your company can also help your million of subscribers to at least understand the big picture of your business as well as a very sensitive aspect of it, namely pricing.
We start our diagnosis by how you present your pricing in your monthly billing to your subscribers. If you say that yours is just like Meralco’s, then the billing presentation must show something like the following (as our own latest monthly statement showed):
Is there anything wrong with this presentation? As far as clarity is concerned, there’s none. This kind of presentation is clear enough especially to you as an electric power distributor. To most electricity subscribers, it is also just as clear. This is true at least to those who read the entire billing summary including the individual components of the bill.
But what about to your subscribers’ psychology? How will they perceive the bill?
If you think about it, you have to admit that even to those diligent readers of your bill, it’s the total amount due that hits hard their eyes, brain and heart. And at this point, each subscriber, not all of course, but most of them, cannot avoid asking:
“Why should I pay for three-fourths of the total that is not the distributor’s service? Why should I pay for the cost of generation, transmission, system loss, subsidies, government taxes, and universal charges when the one billing me is just the distributor? Why should I not just pay for the 25.4 percent of the total that’s due this distributor who’s collecting payment?”
In your particular case, this is what we mean when we talk about the consumer pricing psychology of your presentation as shown in your monthly billing statement. It’s a pricing presentation from the marketer’s end. It’s in effect telling the consumer:
“Look, here’s what you owe me for bringing electricity to your house this past four weeks. I incurred electricity generation costs and transmission costs. I also had to pay for system loss, subsidies, government taxes, and universal charges in bringing this electricity to your house. My part of the entire process is 25.4 percent, which is included in the total amount due.”
That’s how most of your subscriber would read your billing statement. And the larger the total amount due becomes, the more likely it is that the tinge of subscriber anger quickly converts into a flood.
Now, let’s change perspective and talk about the billing from the consumer’s end, that is, from your subscriber’s perspective. Suppose you base your billing presentation from where your subscribers (consumers) are coming. That’s as simple as recording in the bill their daily, maybe even hourly, electricity usages. When these usage behaviors are what the monthly bill shows, then the subscriber’s perception and evaluation of the amount due will change. In fact, it will dramatically change.
How will this presentation look like? Here’s that monthly bill again but this time, its components are presented as follows:
Here, the consumer pricing psychology that the presentation brings out from the subscriber finds her saying to herself something like this:
“So, it’s my use of this and that appliance which are responsible for this month’s large bill. I also have left the lights in the house on several times when I went out to shop and drive the children to school. And that water heater was left on overnight on a good number of occasions. I’ll take note and tell the maids and the children.”
Can such a simple change and just presentation of the billing statement turn a consumer from an angry belligerent subscriber to a guilt conscious responsible creature of God? How can such a simple change be so powerful?
That change is a powerful stimulus because it acts on the consumer’s psychology of perception and evaluation. What the subscriber reads in the changed billing statement are all the things she did with electricity during the past four weeks. Her evaluation said that it was she and the members of her household who did all that were recorded in the billing. The changed presentation of the very same pricing now triggers a radically different but more positive consumer response and feedback.
Here’s the restatement (with appropriate adjustment to consumer electricity consumption) of the principle of consumer psychology that we quoted and applied in last Friday’s Marketing Rx column. As we’ve mentioned, it’s adapted from Robert Cialdini’s 1993 book, “Influence: the Psychology of Persuasion.”
“Consumers perceive the price of a continuously consumed service as reasonable when they know or are made to know that the accumulated price comes from their increased consumption. Conversely, they perceive the price as unreasonable when they know the accumulated price does not come from their increased consumption but from the service provider who is unjustifiably passing on its own increasing costs of doing business.”
Can such a simple prescription really work? This is the question we are always asked whenever we dispense with simple prescriptions. We have this consideration to ask of our readers to take. There are other considerations of course but we focus on this one.
We draw from the lessons of compelling precedents. Take, for example, the telecom companies. When we get at the end of each month our mobile phone’s statement of account, notice how the bill very simply lists down all our outgoing calls and text messages. When every so often we get shocked at total amount the bill requires us to pay, we quickly check what item or items in the list made the difference. The reminder that the list in the bill directs to our memory speedily corrects our doubts. We then turn to a silent resolution to be more frugal in the next month.
The very same service usage history does the same trick in the case of what we find in the bill from our Mastercard, Visacard, and Diners. When any of these bills presents to us what purchase or usage behavior on our part account for the bill’s bottom figure, our price perception is diverted to our side and we evaluate what we remember and know we did. But when any of those bills presents to us what the service provider had to do and what costs it had to incur to bring to us its service, our price perception takes a cynical turn. That’s understandable because we don’t know that terrain and domain of the service provider. As consumers, we only know and trust our own consumer terrain and domain.
As Nobel Peace Prize Winner and microfinance maverick, Muhammad Yunus says, “Go for the simple solution.” That means going also for the simple problem definition. It is problem simplification and solution simplification that works better and best. Not problem and solution complication.