Advance payment systems: Paying too much today and being satisfied tomorrow

Advance payment systems represent a pricing innovation, in which companies predict customers’ future consumption for the following year and then bill a series of monthly, uniform advance payments. Any difference between predicted and actual consumption gets settled at the end of the year with a refund or extra payment. Companies thus gain earlier access to funds and lower risk of customer defaults; customers benefit from predictable monthly payments. However, customers’ reactions to a refund or extra payment sequence in an advance payment system remain unclear. Three theoretical lenses offer predictions about customers’ advance payment system preferences: prospect theory, with a focus on silver lining and hedonic editing principles; mental accounting; and the value of sequences. Using three empirical studies with survey and billing data of more than 20,000 customers to examine their reactions to refunds and extra payments, this paper reveals that receiving a refund reduces customers’ price awareness, increases their recommendation likelihood, and reduces churn and tariff switching, as long as the refund is not too high. The findings illustrate both the consequences and the boundary conditions of the silver lining principle with large-scale field studies.