Imagine you are at an ATM withdrawing cash. Before you do, a message comes up reminding you that there will be a $2 fee for accessing your money through an ATM that is not part of your bank's network. Do you proceed or do you cancel the transaction?
If you were an economist with the Reserve Bank of Australia (RBA), you would have predicted that most would proceed with the transaction. After all, it's only $2. We lose that behind the couch.
Well, much to the chagrin of RBA financial wizards, they didn't count on the impact of consumer 'irrationality'. Instead of consumers banking like they had in the past, when the fee for a foreign ATM withdrawal was buried in terms and conditions and you only found out when you looked at your account statement, consumers have turned away from using these ATMs.
What can you learn from the behavioural economics of ATM fees?
Red rag to a bull
People are more likely to adapt to a new price if they are not constantly reminded of it - it's like a red rag to a bull. In this case, there was no choice for the ATM owners - the communication of the fee was mandatory, but in your business you may have more flexibility. If you can, parcel the fee in with the price point and/or change once and not every time the customer pays.
I'm buying the good not the service
In previous posts I've talked about delivery fees. For instance, order through Amazon and you pay less for the book but get hit with shipping. Order through Book Depository and you pay more for the book but shipping is 'free' (ie included).
People hate service fees so much because they decouple the value of the good from the service in getting it to them. Why? Because you retain the product not the service. Your opportunity is to gain advantage by offering to wipe the cost of service (ie offer "free delivery" or "free installation") because 'free' is extremely persuasive and 'free' on a hated cost of service even more so.
Choose your number
Was the fact that the fee is $2 the issue? I think it did have something to do with it. A lower fee structure, say 50 cents or 90 cents and more customers would have proceeded with their transactions because dollars and cents are psychologically different. If I told you that you are entitled to a $2 discount after you've purchased $30 worth of groceries does that hold more or less appeal than me offering you 4 cents off a litre of petrol (which works out about $2 a tank if you are lucky)? Judging by our slavish devotion to petrol vouchers, 4 cents is extremely persuasive. As a business you therefore need to consider the number context of the fee or discount you are using.
The big lesson out of the RBA experience is that people's irrationality should not be underestimated. Where something looks inconsequential on paper, it can have dramatic behavioural impacts. Your job is to make sure irrationality works in your favour, and behavioural economics is your guide to knowing how.
To find out more about what happened with $2 ATM fees, read Peter Martin's article "Banks' $2 fee has big effect"in The Age.
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(Image from http://www.bikyamasr.com/69294/india-launches-first-talking-atm-for-blind/)