Flat Out Wrong: Why Flat Rates Might be Hurting the Service Industry

“You have used all of your high-speed data for this billing period. You are now using low-speed data until…” This is one common example of what is known as a “flat-rate bias”. Flat-rate pricing exists when a fixed fee is charged for a service instead of the customer paying for their actual usage. Another popular example of this model is the flat-rate fees that countless gyms and fitness centers charge for membership. It’s becoming increasingly common for gyms to charge customers on a monthly basis and to offer incentives for contracted memberships. But is there any empirical evidence to support the notion that a flat-rate bias affects customer churn rates?   

A study recently published in the Journal of Service Research focuses on the impact of a flat-rate bias on customer churn rate and how a company’s position in their respective market plays a crucial role. The researchers worked with a premium German internet service provider (ISP) to track the transactional data of over 20,000 customers from January 2003 until November 2004. The ISP offered four options; one was pay-per-use, two were similar to flat-rate fees, and one was a pure flat-rate tariff.

By comparing the churn probabilities of customers with and without flat-rate biases, researchers were able to calculate the differences of churn between the different payment plans. The results indicated that the flat-rate bias did have a correlation to increased churn. “Customers who always have a flat-rate bias show an 11.22% higher risk of churn than customers without this flat-rate bias.” the researchers discovered.

The study also indicates that the churn rates are affected by who the customers attribute causation for their bias, regardless if it’s flat-rate or not. “To fill this gap, we highlight that customers in a premium segment attribute their flat-rate bias to the provider, display decreased fairness perceptions, and churn with higher probability.”

The findings reveal the impact of monetary losses from overspending on the churn rates. “Among premium service customers, higher monetary losses due to a flat-rate bias further increase churn intentions.”

Managerial implications

This study provides upper management with crucial insight as to how customer churn rate is affected by flat-rate fees, how consumers attribute these biases, and the general impact of monetary loss on churn rates.

Managers, however, are in between a rock and a hard place when it comes to flat-rate bias and its’ effect on churn rates. On one side of the argument, service providers are constantly seeking to improve customer loyalty. But on the other side, there is a significant profit opportunity due to customers’ flat-rate bias. Service providers may earn “up to half their revenue” from rates that negatively impact customers financially.

Before making any changes, the researchers recommend that managers “consider their own competitive position”. They also recommend that service providers consider campaigns to retain customers through means such as providing the option to switch from a flat-rate fee to a pay-per-use rate or “cheaper flat-rate offers”.

To explore the full study, go to the Journal of Service Research. (A fee may apply.)