Why fees can beat discounts when influencing customer behaviour

In an effort to influence customers to switch from disposable cups, Starbucks in London has recently introduced a five pence charge for paper cups, after their longstanding discount for reusable cups was taken up by less than 2% of customers.

Will penalising undesirable behaviour be more effective than rewarding that which is desirable, and are Starbucks risking too much by introducing the fee?

Discounts are not always the answer

Standard economic theory suggests that offering your customer a discount should motivate them to do what you are asking. Why pay $3.80 for your coffee when you only have to pay $3.50? But as Starbucks discovered, a discount has not been enough to move the dial on usage of reusable cups. What’s going on?

On behalf of Irish coffee chain Bewley’s, Cardiff University tested this very issue. In a real-world experiment across 12 café sites, the researchers tested four methods of encouraging use of reusable cups: a discount of 15-25 pence, environmental messaging, distribution of free re-usable cups and a charge of 25 pence on disposable cups.

They found:

• A charge on disposable cups increased the use of re-usable coffee cups by 3.4%,
• Environmental messaging increased the use of re-usable coffee cups by 2.3%,
• The availability of re-usable cups led to an increase of 2.5%,  
• The distribution of free re-usable cups led to a further increase of 4.3%, and
• A discount on re-usable coffee cups had no impact on their usage.

Use of re-usable cups was further increased from 5.1% to 17.4% when they combined free re-usable alternatives, clear environmental messaging and a charge on disposable cups.

There a couple of key lessons here. First, we need to make it easy for people to take the desired action (i.e. make reusable cups available) and second, consider use of a fee rather than discount to solicit compliance.

Penalties can encourage compliance

Penalties, like taxes or fees, are a powerful mechanism because people hate them and will seek to avoid them whenever possible. This is due to loss aversion, where customers hate to lose more than they like to win, which is what Starbucks is banking on. In short, people will be more motivated to bring their reusable cup into the café if it means they can avoid paying more for their coffee. While a discount would be nice, avoiding a fee is even better.

As Cardiff Professor Wouter Poortinga put it: “People are far more sensitive to losses than to gains when making decisions – so if we really want to change a customer’s behaviour then a charge on a disposable cup is more likely to be effective.”

Loss aversion has not only been applied to disposable coffee cups. Plastic bags are also an environmental problem requiring a behavioural solution. To that end, Cornell University’s Tatiana Hoffman studied the difference between a five-cent tax on plastic bags and five-cent bonus for reusable bags, and discovered the tax reduced use of plastic from 82% to 40% while the bonus had no impact.

The lesson is fees can be more effective in encouraging desirable behaviour, but will your customers like you for it?

Penalties can result in too much avoidance

A council in Sydney last year scrapped fees for overdue library books. To their delight something beautiful happened – more books were returned. Why? People no longer had to avoid bringing books back and being whacked with a fee.

This illustrates one of the downsides of fees – people may simply avoid doing business with you entirely. That means they may choose go to the café that doesn’t charge extra for a disposable cup, or the supermarket that gives them plastic bags for free.

So here’s the rub: introducing a fee might be better at getting your customer to comply with the desired behaviour, but they may resent you for it. Regulators in some countries are getting around this by making plastic bag taxes mandatory for all businesses, so a customer will be stung wherever they go. But will they do the same for disposable cups? Until they do, businesses like Starbucks are at some risk of losing their more fickle, cost-sensitive customers.

Fees or discounts, which to choose?

It is natural enough to assume a discount will be enough to entice your customer, but as we’ve learnt, loss aversion is more likely to influence behaviour. The upshot is you will get most traction by doing both.

In other words, offer a discount they risk losing if they don’t comply, shifting it from a “nice to have” to “I don’t want to lose” discount. Pay on time discounts are an example of this because the customer is endowed the discount unless they fail to take the desired action.

NOW READ: Late fees vs on-time discounts: Which drives more effective behaviour?