The Power of Price Abstraction: Why We Pay More Without Realising It

Have you ever noticed that you're willing to spend more when you’re not handling cash? From credit cards to mobile payments and self-serve kiosks, companies have long known that the more abstract a price is, the more we’re prepared to pay. This phenomenon, known as price abstraction, refers to the disconnect between the value of money and how we perceive it in non-physical forms. In this article, I’ll dive into how price abstraction has evolved over time, influencing spending behaviour and increasing average order values across industries.

The Birth of Credit Cards: A Game Changer for Spending

The concept of price abstraction took off in a big way with the introduction of the credit card. First launched by Diners Club in 1950, credit cards transformed the way consumers approached spending. Unlike physical cash, where the act of handing over banknotes is a tangible reminder of the money being spent, credit cards allowed consumers to defer payment, separating the act of purchase from the immediate loss of cash.

In the following decades, the use of credit cards exploded, and by the 1970s, they were widespread in households. Early studies showed that spending with credit cards could be over 100% higher than spending with cash, though the early studies didn’t account for other possible confounding factors – perhaps people with credit cards were simply richer.

More recent and better controlled studies showed that consumers were willing to spend 12-18% more when using credit cards compared to cash. This effect was particularly notable in retail, especially in sectors like fashion. Prelec and Simester (2001) examined spending patterns which highlighted how consumers using credit cards were more likely to make impulse purchases and spend more on higher-priced items, and saw a 34% premium when using a card. Men and women alike increased their spending on clothing, but women were particularly susceptible when it came to luxury fashion, often spending significantly more when the payment method was abstract.

Why? Well, there’s something tangible about handling cash. You get the notes out of your purse or wallet, and one by one you count them out then hand them over. You have a visceral feel for just how much money you are spending.

Paying by card? Well, it’s just number, it doesn’t feel real.

Another reason is that when you hand over cash the money is gone there and then. When you pay by credit card the money goes out in the future, and other studies have clearly demonstrated that we value money less in the future than right now.

Modern-Day Abstraction: From Tap-and-Go to Membership Models

As technology has advanced, price abstraction has become even more sophisticated. Here are a few examples of how abstract forms of payment have continued to drive higher spending:

• Tap-and-Go Payments: With the rise of contactless payments via smartphones and cards, consumers don’t even need to key in a PIN to complete a transaction. A quick tap, and the payment is processed. The abstraction is even greater here than with traditional credit cards, and the result is clear: average order values tend to rise. According to Barclaycard, contactless spending increases each year, and 93.4% of all transactions in store during 2023 were tap-and-go. You can see why – tap-and-go is convenient, and it reduces immediate physical or mental friction in the payment process.

• Holiday Bonds and Memberships: Take, for example, subscription-based or membership models like Holiday Bonds. In these schemes, members prepay for a set amount of time in holiday resorts. Since the money has been spent upfront and isn’t tied to individual holiday expenses, members often end up spending more on extras such as meals and entertainment once on-site. The initial payment becomes “sunk cost,” making each additional spend feel less consequential.

• Digital Menus During Covid-19 Lockdowns: During the pandemic, many restaurants moved to digital menus to minimise physical contact. One restaurant I spoke to saw their average order value for a meal rise from around £12.50 to £15 (a 20% increase). Research backs this up, and has shown that when customers order via apps or online systems, they tend to order more.

McDonald's and Self-Serve Kiosks: The Psychology of Increased Spending

A fascinating case study in price abstraction comes from McDonald’s, which rolled out self-serve kiosks across its global locations in the mid-2010s. These kiosks allowed customers to browse the menu and place orders without interacting with staff, significantly altering the ordering experience.

The primary motivation behind these kiosks was to reduce labour costs by automating order-taking. However, there was another important factor at play: the potential to increase average order values.

Kiosks, much like other abstract pricing methods, encourage customers to explore the menu at their own pace. There’s no rush or social pressure, and the kiosks even prompt users to upsize meals or add extra items – it is much easier to tweak an order by adding some extra cheese or some strips of bacon to a burger than when you are in a queue, talking to a harried member of staff, with an impatient line of people behind you.

Research has shown that McDonald’s saw an increase in average order value of 15-20% following the introduction of these kiosks. Customers were more likely to order sides, desserts, or larger drinks when prompted by the kiosk, a behaviour less common when ordering face-to-face with staff. Moreover, the kiosks were reported to have improved efficiency by streamlining the ordering process, leading to faster service times and fewer mistakes in order-taking. This not only cut costs but also encouraged repeat visits by enhancing the overall customer experience.

Why Does Price Abstraction Work?

The psychology behind price abstraction is relatively straightforward. When the link between a purchase and the immediate outflow of cash is broken, spending becomes less painful. This is known as payment decoupling, where consumers separate the mental act of paying from the purchase itself. Whether it’s via a credit card, smartphone, or self-service kiosk, price abstraction reduces the emotional “pain of paying,” leading to larger purchases and higher overall spending.

But What About Business Markets?

Price abstraction is a strong consumer market factor. But it can also have applications in business.

For example, if you buy images from istock you can do so either by subscription (a recurring monthly fee) or on a pay-as-you-go basis. But to use the PAYG approach you have to buy packs of credits, and different images then cost different amounts of credits. Their pricing plan looks like this:

1 Credit = £7

3 Credits = £20

6 Credits = £35

12 Credits = £69

18 Credits = £100

24 Credits = £130

36 Credits = £190

60 Credits = £310

150 Credits = £750

300 Credits = £1,450

Notice something? Quick – divide £69 by 12 in your head, or divide £190 by 36. Quite a lot of the options are hard to work out the per-credit cost. And anyway, you buy the credits one day, and then many days later you download an image. What was a credit worth? I can’t remember.

This is a B2B sale. Freelancers, marketing agencies, internal corporate marketing departments; they all buy images.

Another approach might be to let customers accumulate something of value such as maintenance points with each order, and they can redeem those points for a service visit. This ties them into the business.

For professional services, retainers are a price abstraction methodology. A fixed monthly fee is agreed, and then the client calls on the service when required. Often the monthly fee is taken by direct debit, so almost no one notices or thinks about what is being spent (until the next financial year).

What do we conclude from this? Price abstraction is a powerful tool, and in consumer markets it is ubiquitous; but in B2B markets it is seldom used, though they too could consider it.