2- and 3-part Cost Structures in Consumer Behavior: The 'Free' Allowance

2- and 3-part Cost Structures in Consumer Behavior: The 'Free' Allowance

In the past decades, an increasing amount of companies from various industries have tried to change their pricing structures. A common seen trend, in particular among telecom providers, banks and energy providers, is the replacement of a 2-part costs structure by a 3-part costs structure:
Two Part Cost Structure: The price/cost of a certain service exists of a fixed (usually monthly) access price and a usage price for every unit consumed. These “unit’’ range messages or minutes in the telephone industry to cheque-writing in the banking industry.
Three-part Cost Structure: This structure adds a third part to the two-part cost structure, which exist of paying only for consumption that exceeds a certain usage allowance, while within the allowance you can “freely” consume.
So why do these companies do this? A study by Ascarza, Lambrecht and Vilcassim (2012) finds that the word “free” makes customers spend more for a certain service than they would otherwise. This does not mean that they benefit. Rather, they seem to spend more than they had planned to do. This is mainly because consumers do not take individual budget constraints into account once they believe they do use the units “freely” within the allowance and pay only after having exceeded a given allowance.
Ascarza, E., Lambrecht, A. And N. Vilcassim (2012) “When Talk is Free: The Effect of Tariff Structure on Usage Under Two- and Three- Part Tariffs” Journal of Marketing Research