Sunday, July 25, 2010

The Psychology of Marginal Cost

One of the side-effects of moving internationally is that one is typically required to completely re-evaluate the set of services which we are generally accustomed to - e.g water, power, telecommunications, transport etc. Partly because traditional utilities are very local and partly because the circumstances of life are more or less subtly organized differently in different places. One such difference can be the available pricing models for a particular service - most commonly some form of flat-rate or metered pricing.

In areas where both flat-rate and metered pricing plans exist, analysis often shows that even though many consumer prefer flat-rate, the typical user would be better off with metered pricing, as only very few heavy users manage to fully use or "abuse" the plan.

Consumers often quote predictable cost and "no bad surprise" at the end of the month as a key benefit of flat-rate pricing. But another interesting observation to take into account is that in most cases, flat rate pricing stimulates increased usage. The real motivation for consumer to choose flat-rate pricing, specially for things related to fun and entertainment, might also be to get the unpleasant financial considerations out of the picture once and for all and not to remain as a kill-joy, nagging question each time the user feels like making use of the particular service.

For us, the most significant area of changed behavior seems to have been transportation. In Switzerland there is a flat-rate pricing option for all public transport, popularly referred to as the GA (in German). For about 200CHF per month and person, this allows to hop on any train, bus or boat anytime, anywhere in Switzerland. On the other hand, we don't currently own a car. This decision was made easier by the existence of Mobility CarSharing - a dense and well established car sharing service. The signature red Mobility cars can be found at almost any train station and there are about 6 cars available in our neighborhood, just a few hundred meters from our front-door. Pricing is a mix of hourly rent and per-km charge, which clearly encourages a networked usage of trains for long-distance, mobility car for "last mile" service. Pricing is around 3CHF/h (0.6CHF during night-time) and 0.5-1CHF per km charge depending on the car model. This is clearly not cheap and for a long week-end trip breaks about even with a normal rental car.

However, the membership based system and the dense network of dispersed self-service locations offers hugely better pickup and drop-off experience than any rental-car company possibly could. Having a small child, we knew that the optimized combination of train and car would likely not work, due to having to lug around a heavy ECE R44 group II compliant car seat in addition to all the other stuff, small children generally come with. Yet assuming the cost of owning our own car to be at least about 1000 CHF per month, we could literally take a car for each week-end and still come out ahead.

After almost a year, it turns out that we have used the car less than half a dozen times (mostly going to IKEA or other furniture moving activities) and did all other travel including many spontaneous excursion by public transportation. One key factor is that the decision to take the care will most likely result in a bill in the order of hundred(s) of CHF, while the marginal cost of using any public transportation for any time or distance is for us now zero CHF. Even with the streamlined procedures, reserving, picking up and dropping of a mobility care requires some level of planing, preparation and discipline, while the combination of GA and Google mobile transit directions provides a near frictionless level of spontaneous mobility (at least between town centers). Yet, despite the very dense Swiss transportation network, a typical trip still takes us much longer by public transport than it would by car - but maybe because I don't particularly like driving, I am more willing to put up with time lost having to wait for a connection.

Despite a bit of traveling in the last year, we still did not reach or exceed the cost of the GA compared to the optimal strategy using individual fares. Yet we would still consider it as a success, by putting a lot of emphasis on convenience (not having to figure out what the idea fare is, and how each ticket vending machine works...) as well as not having any excuse to avoid going out and discovering our new surroundings - encouraged by the psychology of a zero marginal cost for each trip.