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How to reduce the pain of paying

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Nobody likes parting with their money but research suggests that the act of paying might even be physically painful. This phenomenon, known as the pain of paying, plays an important role in any purchasing decision, and understanding the psychology of paying will help you understand why and how customers buy.

Finding a product that we want sets of the brain’s pleasure center and releases endorphins. Unfortunately, paying for that same product can have the opposite effect. Researchers have found that a part of our brain called the insula is activated when we are confronted with an expensive purchase. This part of our brain is known to be associated with feelings of both disgust and pain and it lights up like a Christmas tree when we have to pay for something expensive.

Why using a card hurts less
Interestingly, this “pain of paying” is also affected by how we pay. Over the years, experiments have found a clear difference between paying by cash and by card. One such example is a 2001 study by MIT professors Drazen Prelec and Duncan Simester where students were asked to bid for sold-out basketball tickets. Half of the students were told that they could only pay by cash and the other half that they could only pay by card. The results were that the card-paying students were willing to pay nearly twice as much as the cash-paying students. In tests with fMRI machines, researchers have also found that the insula is activated far less when we pay by card as compared to cash, meaning that there is less “pain” involved in the purchase.

One explanation for this is that we have different relationships to different kinds of money. Since cash is a physical representation of value our brain tends to experience more “pain” when paying with it than with cards, where the value is only represented by an abstract number on a screen.

Another difference has to do with when we pay. With credit cards we don’t actually pay at the time of the purchase. Rather, we are sent a bill at the end of the month were all of the month’s purchases are lumped together. Back in 1998, professors Drazen Prelec and George Loewenstein found that this ”decoupling” between when we consume a product and when we pay for it actually reduces the pain of paying and leads to higher spending.

The best way to pay for a vacation
Another interesting finding by Prelec and Loewenstein was that consumers tended to get more enjoyment out of consuming products that they had paid for far in advance. This phenomenon, which they called prospective accounting, meant that consuming something that had already been paid for felt almost like getting it for free. This phenomenon means that consumers enjoy an experience, for example a vacation, more when they have paid for it in advance because the enjoyment isn’t polluted with the pain of payment.

According to Dan Ariely, a professor of behavioral economics at Duke University who has studied this phenomenon, the second best option is to pay everything at the end of the vacation, gathering your pain of paying at one point. The very worst option, he says, is to “pay as you go” since this leads to you feeling the pain of paying throughout your vacation. Because of this psychology, many resorts, spas and casinos use payment systems were the customer buys tokens at the start of their visit that are then handed in for things like meals and drinks.

A little pain doesn’t hurt
Payment psychology also plays an important role for subscription services. By paying a whole year’s gym membership in advance, for example, you get a definite decoupling between payment and consumption. The “prospective accounting” phenomenon means that members who pay for their membership in advance feel almost as if they are working out for free by the end of the year. Great, right?

Well, actually no. Since these members are not reminded of the cost of the membership they also tend to value it less. Members who pay on a monthly basis, on the other hand, get a monthly reminder of the pain of paying and tend to hit the gym more often to “get their money’s worth”. This is also known as the “sunk cost effect”. And because this group uses the gym more regularly they are also more likely to renew their membership, something that any gym would prefer.

The gym example highlights an interesting aspect of the pain of paying. While reducing the pain, for example by paying in advance or paying by card, leads to more purchases it also reduces our perceived value of the product we have purchased. This means that a higher pain of paying actually makes us more likely to use the product we bought. For companies, finding the right balance between the two means that you can both sell more and retain more customers.