Prospect Theory in Paperless Billing

Businesses want their customers to switch to paperless statement for multiple reasons. The chief among them is that it costs them tp print and mail the bill and there are green reasons. They tried incentives to get their customers to switch to online billing. Some sent coupons or cash discounts. Yet none of these worked as well as T-Mobile’s plan to charge its customers $1.50 to receive paper statements. The New York Times reports,

The new fee immediately produced an explosive increase in the rate at which customers converted to paperless billing. Before the August bills were mailed out, T-Mobile had an average of a little more than 1,000 customers sign up for paperless billing each day.

When the $1.50 fee was added to the bills that went out in August, the number jumped to 33,000 a day, according to a spokesman. This was even before the charge really bit: for August, T-Mobile also added a matching $1.50 credit to every bill for the initial month, to give customers more time to decide whether to opt for paperless.

Why did the customers who willingly give up gains in the first case? Why did they switch when hit with a fee? This is because we all perceive gains and losses differently. According to   Kahneman and Tversky, the intensity of positive feeling from the gain is not as high as that from losing $1.50. Hence the big jump in the number of customer who switched to paperless billing.

Is there a fairness issue here? If receiving paper statements adds value to customers then it is appropriate for T-Mobile to get a fair share of that value. One more thing, USPS should increase its charges for these paper statements as well, after all if businesses get value from mailing these paper statements, USPS should get its fair share for providing this service.

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