A pricing strategy that I have found particularly interesting is the Pret 'Club Pret' subscription. For £30 a month customers get up to 5 barista-prepared drinks per day and 20% off everything sold in-shop. The company claim that 'Club Pret' subscribers transact up to 28 times per month, compared to just two times per month for non-subscribers. Evidently, the difference in behavioural engagement between non-subscribers and subscribers is significant! Similar results have been found for Amazon Prime, where members spend twice the average of non-members.The nature of the subscription and the marketing tactics used by Pret are very interesting as a number of marketing concepts seem to be at play. This blog post explores marketing concepts and its applications to the Club Pret subscription.

The market is not homogenous but composed of different groups of consumers. This is well-established and understood by marketers. Yet, the consumer decision-making process is still not fully understood. ‘Willingness to pay’ is a term used by marketers to conceptualise the point where a consumer decides to make a purchase. For example, variations in price-levels influence the ‘willingness to pay’ of different consumer groups. Additionally, consumers use decision frames to evaluate purchase decisions. Consequently, such decision frames moderate attitudes towards willingness or perceived ability to pay. Through influencing decision frames, marketers can influence consumer behaviour. As a result, not only are marketers required to respond to varying degrees of price elasticity, but they are required to understand the underlying factors that precede such attitudes.

A major factor in understanding price sensitivity is the psychological bias of loss aversion, formalised by prospect theory. The main implication of prospect theory is that the buyer’s state of well-being, at the time, of a decision is characterised as the buyer’s reference point. As a result, their decision outcomes will be categorised as a loss or gain relative to this reference point. Consumers are found to overvalue losses relative to gains of the same size. This may explain why certain pricing strategies may be attractive to some consumers and not others.

(1) Smaller losses are bundled: the daily cost of paying for a single coffee is bundled into a monthly subscription. The intuition behind this is that buyers perceive their utility to be less negatively affected if multiple losses are bundled together. As a result, they perceive the subscription as a "less painful" than paying for a coffee everyday.

(2) Reference price: The reference price of the subscription is framed relative to 5 cups of coffee a day. I think this is very smart, because even if the consumer does not drink 5 cups of coffee a day, they are prompted to assess the value of the £30 subscription relative to 5 cups of coffee (£13.75 approx. for 5 black americano's).

(3) Bundling smaller losses with larger gains. Not only do the marketers set the decision frame that consumers use to make the purchase decision. The marketers use the decision frame, of 5 coffees a day, to effectively bundle smaller losses with a larger gain. By framing the price of a £30 subscription as a large gain of 5 "free" coffees a day, the consumer is prompted to perceive the cost as less painful than if they were to pay a daily cost for coffee.

(4) Unbundling the gains. Pret offer a 50% discount off the first month for new subscribers. The intuition behind this is that buyers perceive their utility to be more positively affected if multiple gains are offered separately.

(5) Endowment effect and framing of prices. The price of the subscription was increased earlier this year from £25 to £30. Previously, the subscription was increased from £20 to £25. A incremental increase of £5 is more likely to be accepted than if the subscription were increased by £10. The intuition behind this is that after each purchase buyers will adjust their frame of reference and be less resistant to a future incremental increase in price.

(6) Switching costs: The loss associated with giving up the subscription may be higher than the loss associated with paying an increased price for the subscription. As a result, current subscribers are unlikely to un-subscribe. In this case, there is also an associated switching cost with giving up the subscription. Subscribers would have to switch from scanning a QR code to paying by card when making purchases. Although the change in behaviour is not drastic, the anticipated switching cost here may be psychological rather than physical. Subscribers may anticipate the annoyance with having to make daily purchases relative to the ease of scanning a QR code to pay.

A subscription service is only interesting if it is effective in increasing customer engagement with the brand. Further, a subscription service will only appeal to particular segments of consumers. This prompts the question: on what basis should marketers segment subscribers vs non-subscribers?

Raghuram et al. (2022), explore the characteristics of subscribers that were most profitable to a personal care retailer in Asia. The authors group customers into 3 segments based on: pre-subscription purchase behaviour, costs incurred to the business and post-subscription purchase behaviour. They found that the highest value customers increased their purchases only moderately post-subscription. The increase is moderate because this segment were already making purchases pre-subscription. This is explained by the 'sunk cost' fallacy. Studies suggest that consumers that purchase a subscription exhibit a 'sunk cost' fallacy, whereby consumers hold the initial 'sunk' cost of the subscription in a mental account, and increase their purchases, to ‘amortise’ the psychological burden of the cost. The authors found evidence that as customers benefit more from the program and the sunk cost effect is amortised, the effect wears off. Raghuram et al. (2022) suggest that because segment 3 increased their purchases only moderately post-subscription, this reflects that this segment is less susceptible to the 'sunk cost fallacy'. Therefore, this segment were more likely to remain engaged with the brand. Although these results are likely to be specific to the demographic group and product category, the implications of the results are interesting!

References:

Iyengar, R., Park, Y.-H., & Yu, Q. (2022). The impact of subscription programs on customer purchases. Journal of Marketing Research, 59(6), 1101–1119. https://doi.org/10.1177/00222437221080163

Reisinger, Don. (2017), " Here's How Much Amazon Prime Customers Spend Per Year ," Fortune (October 18), https://fortune.com/2017/10/18/amazon-prime-customer-spending/.