Cloudonomics: The Business Value of Cloud Computing, + Website

Flat-Rate Bias

One of the defining aspects of a cloud service is that it is pay per use: When usage varies, so does the incurred charge. In Chapter 11 we saw that such a payment scheme can enable economically optimal solutions, yet customers often prefer flat rates.

According to Anja Lambrecht of the London Business School and Bernd Skiera of Goethe University of Frankfurt, there are several reasons for the “flat-rate bias.”11 The “insurance effect” is one: Customers want to smooth monthly bills and appease their aversion to loss. The “taxi meter effect” is another: Watching the taxi meter running up a bill reduces the pleasure associated with an activity. Even without an actual meter, “mental accounting” can have the same impact.12 The “convenience effect” is related to the ease of selecting the default option, which is often flat rate. Finally, the “overestimation effect” occurs when customers believe that their usage levels will be higher than they actually are. Consumers are likely to overestimate their ability to forecast future usage, leading them to overpay by selecting the wrong plan.13

The flat-rate bias may not be that irrational: Celina Aarons had a T-Mobile phone service family plan with a normal monthly bill of less than $200. Her brother sent some text messages and downloaded some videos while in Canada for two weeks and rang up a bill for the month of over $200,000.14 Lack of policy-based control, a pricey rate plan, and lack of real-time visibility regarding charges ...