Last week, I found that my favorite Italian place for lunch breaks introduced few changes to its pricing system.
 My favorite restaurant changed its pricing system
Now it is offering loyalty cards: after ten orders you receive the eleventh for free. But the loyalty card came with a caveat: prices went up from €6.00 to €6.50 for standard pasta meals.
I wondered whether I was happy with the change. In particular, whether I was happy with the price increase.
What appears to be a straightforward case is actually
The loyalty card gives you a discount. Most people are simplifying math calculations – in particular when it comes to percentages – to save precious mental energy for more important tasks than calculating precise discounts on noodles. Based on related research on the perception of discounts (Chen et al. 2012), I guess many people would treat this discount as 10% off (actually it is 1/11 = 9.09%).
If you take your loyalty card always with you and redeem all discounts, you would get 10% off.
So the pasta cost only €6.50 minus €0.65 = €5.85. This is less than before (applying the actual discount of 9.09% the new price after discount is €5.91 per meal – but still less than €6.00).
Okay – if you ALWAYS use the loyalty card and your VERY LAST PASTA in this place will be the eleventh
 Consumers are overconfident about their future
However, people overestimate their future behavior (Morwitz 1997).
But – let’s assume for a few minuti (this pun is for all who have their lunch breaks at the same place) that you don’t redeem all your discounts. Maybe you do – but assume some customers never plan to take the card with them, some lose the damn card half-way through and start a new one, some customers forget to bring the card every now and then, and few customers just do not return ten more times. Lacking reliable data, at least one source considers a loyalty program with a redemption rate between 25% to 35% as healthy (Customer Insight Group 2018).
 Sad truth: prices might
As a simplified calculation, the restaurant sells 110 meals to 10 customers. 10 meals would be for free, but
However, people are only dissatisfied with price increases if they assume the business owner is responsible for it. Xia, Monroe and Cox (2004) summarize various studies showing that customers perceive price increases as less fair (and are less satisfied with the new price) if the business owner increases price to make more profits (instead of just adding cost increases and keeping the same margin).
 But who is responsible for the price increase? Do you blame the restaurant owner?
No – the only reason
This is a wonderful example for the power of psychological pricing. You increase prices which
Lesson learned: Rethink your pricing system and consciously think about how to communicate and “package” your price increase.
By the way, I already have two stamps – and, honestly, for this great place I would even pay 20% more.
Customer Insight Group (2018). Loyalty Program Breakage: Health Measure of Program. https://www.customerinsightgroup.com/loyaltyblog/brandloyalty/loyalty-program-breakage-health-measure-of-program (last accessed Feb-9, 2020).
Chen, H., H. Marmorstein, M.
Morwitz, V. (1997). Why Consumers Don’t Always Accurately Predict Their Own Future Behavior. Marketing Letters, 8(1), 57-70.