Tackling Consumer Overconfidence: A Smart Way to Price Services

You’re a service provider, and your customers are a bit too confident about how much they'll use your services. This overconfidence can mess with your pricing strategy. Traditional pricing models assume customers are rational, but we all know that’s not always the case! Overconfident customers might overestimate their usage, leading to surprises when the bill comes. This study looks into a special pricing plan called a three-part tariff. It has three parts: a fixed fee, a variable fee, and a cap. The cap is like a safety net, preventing massive bills even if usage goes sky-high. The researchers used math models and computer simulations to find the best way to set these three-part tariffs. They also compared it to simpler plans, like two-part tariffs or menus of tariffs, to see what worked best. With overconfident customers, service providers need to be smart. They need to know when to offer these three-part tariffs and when to stick with simpler options. The goal? To boost profits and market share. So, if you’re a service provider, pay attention! Overconfident customers can be tricky, but with the right pricing strategy, you can turn their confidence into your gain.