The IKEA effect: Why labor leads to love

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Discount Clubs and Membership Fees, or Why We
Buy 100 Pounds of Spaghetti

• Michael Norton
• Harvard Business School
• Leonard Lee
• Columbia Business School

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A trip to Costco
Eggs Paper Towels Bread Toilet
Paper Toothpaste Aspirin
Portable Air Conditioner 8 Bottles of Wine New
Sheets 10 pounds of venison New Bath Towels 100
pounds of pasta
What You Actually Buy
What You Intend to Buy

• Eggs
• Paper Towels
• Bread
• Toilet Paper
• Toothpaste
• Aspirin

Or in my fathers case
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Discount Clubs

• Large and growing presence
• One recent survey reported that Costco sells to 1
  in every 11 people in the United States and
  Canada (Spector, 2005)
• Estimated to be a 110 billion industry

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Why do they work?

• Rational
• Volume discounts
• Irrational
• 100 pounds of pasta
• Purchasing behavior over and above any real
  savings
• Fees?

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Why do they work?

• Why might fees decrease profits?
• Deterrent from entering the store
• Why might fees increase profits?
• Price Perceptions
• Implicit contracts between store and consumer
• Price increases acceptable when firm incurs more
  costs (Bolton Alba, 2006)
• Membership fees signal deeper discounts?

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Overview

• Impact of fees on
• Consumer Behavior
• Willingness to Pay Fees
• Subsequent Spending
• Price Perception
• Company profits
• Four Studies
• Study 1 Predictions about Fees
• Study 2 Fees and Real Spending
• Studies 3A, 3B, 4 Fees and Price Perception
• Study 5 Fees and Choice of Retailers

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Our Store
6 of each item
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Manipulation (between-subjects)

• No Fee
• As experimenters, we frequently buy a variety of
  products and items that we use as experimental
  stimuli or prizes, and we would like to make some
  of these items available to our participants for
  purchase.
• Fee
• To make this program available to our
  participants on a continual basis, we would like
  to request that you pay a fee of 0.50 to enter
  the store.

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Study 1 Predictions
Would you buy something? If yes, how much
would you spend?
N 76
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The Store
6 of each item
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Study 2 Behavior
N 80
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Studies 1 and 2

• People predict twice as much value for no fee
• In reality, three times as much value for fees

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Studies 3A and 3B Price Perceptions

• Study 3A
• Which has lower prices?
• Study 3B
• What price?

p
ps
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Study 4 The Whole Picture

• Replication of Study 2 real buying
• Assessed price perceptions (5-point scale)

N 78
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Study 5 Retailer Choice

• In Study 1, consumers predicted fees would
  dissuade them from entering stores
• Can the presence of fees lead consumers to choose
  one retailer over another?
• Even given the same amount of savings?

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Newspaper Circulars
Manipulate which store charges fee
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Study 5 Retailer Choice

• Will consumers realize their mistake?
• Cant compare different sizes
• Wont compare stuck with membership fee
• Sunk costs (Arkes Blumer, 1985 Staw, 1981
  Thaler, 1980)

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Summary

• Despite predictions to the contrary, fees (at
  least small fees) can lead to greater spending
• Related to perceptions of lower prices
• For the same products
• Can lead to choice of merchant, based on illusion
  of better deals

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Fees and Visibility

• Companies that charge fees for services
• Motivated to have consumers pay fee and never
  show up
• Increased usage when aware of fees (Gourville,
  Soman)
• Implication Hide fees

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Fees and Visibility

• Companies that charge fees for products (Costco)
• Motivated to have consumers pay fee and
  frequently show up
• Our results Fees spur spending
• Implication Constant reminders of fees?

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What is the right fee to charge?

• May be a curvilinear relationship between fee and
  price perceptions
• When fees are low ? too good to be true
• 10 CDs for .01
• When fees occupy a middle ground ? low price
  perceptions
• Our studies, Costco, Sams Club
• When fees are high ? quality/exclusivity
  perception
• Country clubs

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Next

• Manipulate visibility and fee level
• In the field
• Local video rental retailer
• vs. Netflix and Blockbuster

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• Thanks

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Can Fees Bias Memory?

• Fees lead to greater usage of services (Soman,
  Gourville)
• Might they lead to the belief that one has used
  services more in the past?
• Back to service providers
• Gym
• Reminder/no reminder

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Memory - Gym
F(1, 192) 4.93, p 30
Memory - Gym
Interaction F(1, 192) 4.16, p