Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats a Flat Rate as an All-You-Can-Eat Buffet
Transcript
- Lucas: So here's a question — why do we pay for the buffet when we only want the salad? Luna: I feel like that's the story of every gym membership I've ever had. Lucas: Exactly. And there's a name for this in behavioral economics — it's called the flat-rate bias. It's the tendency to choose a flat-rate pricing plan over a pay per use plan even when the flat rate costs more. Luna: Right, because we think we'll use it more than we actually do. Lucas: That's part of it. But the research shows it's deeper than just overconfidence. We're actually averse to the feeling of being 'metered' — every visit, every click, every class feels like a charge, even if it's small. The flat rate removes that friction. Luna: So we pay a premium for peace of mind, even if we don't use it. Lucas: Right. And companies know this. Take ClassPass — when they started, it was pay per class. You bought credits, you used them. But they found retention was low because people would skip a month if they felt they hadn't 'gotten their money's worth'. Luna: So they switched to a subscription model. Lucas: Yeah, in 2018 they moved to a monthly subscription with a set number of credits. And suddenly, even if you didn't use all your credits, you felt like you had access. The flat rate created a psychological anchor — 'I'm paying for unlimited potential.' Luna: And that anchor makes you less likely to cancel, because you're not evaluating each class anymore. Lucas: Exactly. A 2023 study from the Journal of Consumer Research found that 67 percent of gym members would save money by paying per visit instead of a monthly flat rate. But they don't. Because the flat rate feels like a deal — you're buying the option to go anytime. Luna: It's like the all-you-can-eat sushi place. You know you'll only eat six rolls, but the unlimited option feels like a win. Lucas: And the data backs that up. In a field experiment at a gym, researchers offered new members either a flat-rate monthly plan for $70 or a pay per visit plan at $10 per visit. Most chose the flat rate. Then they tracked actual attendance — the average flat-rate member visited 4.7 times per month, costing them about $15 per visit. The pay per visit folks visited 3.2 times, paying $10 each. Luna: So the flat-rate people paid more per visit, but felt better about it. Lucas: Right. And that's the core of the bias — it's not about rational calculation, it's about avoiding the pain of paying each time. The flat rate turns a variable cost into a fixed one, and our brains treat fixed costs as something we can ignore after paying. Luna: Sunk cost, but in reverse — we've already paid, so now we can use it guilt-free. Lucas: Exactly. And companies structure their pricing to exploit this. Netflix, for example — they offer three tiers: Basic, Standard, and Premium. Most people pick the middle one, not because they need HD or four screens, but because it's the 'safe' choice that feels like the best value. Luna: That's the decoy effect at work too. Lucas: It is. But with flat rates, there's an extra layer — the top tier often includes something intangible, like 'unlimited' or 'premium access.' And we anchor on that top tier, so the middle one feels reasonable. Luna: Let's talk about another example — airline lounge passes. You can buy a day pass for $50 or get a credit card that gives you unlimited lounge access for $450 a year. Lucas: And unless you're flying every week, the day pass is cheaper. But the unlimited pass feels like a status upgrade, and it creates a sunk-cost treadmill — once you have it, you feel compelled to fly more to justify it. Luna: So the flat rate actually changes your behavior downstream. Lucas: It does. There's a concept called 'flat-rate love' — people who choose the flat rate end up using the service more than they would have under pay per use, precisely because they're trying to justify the cost. It's a self-fulfilling prophecy. Luna: So if you're a company, you want to offer the flat rate because it increases usage and retention. Lucas: And it reduces churn. A study from MIT found that customers on flat-rate plans for a digital service had a 40 percent lower cancellation rate than those on usage-based plans, even when the flat rate was objectively more expensive. Luna: But there's a limit, right? If the flat rate is too high, people won't bite. Lucas: That's where pricing psychology gets interesting. You need to find the 'sweet spot' where the flat rate feels like a deal relative to the pay per use alternative, even if it's not. That's why gyms often set the monthly rate just below the cost of four or five visits — so you think 'if I go twice a week, I break even.' Luna: And most people go less than that. Lucas: Much less. But the mental math is already done. You've already convinced yourself it's a good deal before you even step in the door. Luna: So what's the takeaway for someone listening? How do you avoid falling for the flat-rate bias? Lucas: First, track your actual usage. If you're paying for a gym membership, count how many times you went last month. Be honest. If it's less than the break-even point, switch to pay per visit or a cheaper plan. Luna: And for subscriptions, ask yourself: do I really need unlimited, or would I be fine with a limited plan? Lucas: Right. And there's a broader lesson here — when you see a flat rate, pause and calculate the per-use cost based on your actual behavior, not your aspirational behavior. Because your brain will default to the optimistic scenario. Luna: It's like we're all betting on our future selves to be more disciplined. Lucas: Exactly. And we almost always lose that bet. Luna: Speaking of bets — there's another angle here. The flat-rate bias also affects how we think about insurance and warranties. Lucas: Oh, that's a great point. Extended warranties are essentially a flat-rate plan for repairs. You pay a fixed amount upfront to cover potential future costs. And the data shows they're almost never worth it — the expected value is negative. But people buy them because they want to avoid the pain of a surprise expense. Luna: So the flat-rate bias extends beyond subscriptions into any situation where we can trade variable costs for a fixed fee. Lucas: It does. And it's particularly strong when the variable costs are unpredictable. Think about utility bills — some people choose flat-rate energy plans even when they know they'll use less than the average, just to avoid the shock of a high bill in winter. Luna: That's the insurance mindset — peace of mind has a price, and we're willing to overpay for it. Lucas: And companies know that. So they design pricing that plays into that desire for certainty. It's a powerful tool, but it can also be a trap if you're not careful. Luna: I wonder if there's a way to use this bias to your advantage — like, set a flat rate for your own spending in a category to avoid the pain of paying each time. Lucas: That's actually a smart personal finance hack. If you know you'll spend $200 a month on dining out, put that in a separate account as a 'flat rate' and then use it guilt-free. It's the same psychology — you've prepaid, so you don't feel the pain of each transaction. Luna: It's like a mental subscription to yourself. Lucas: Yeah. And if you're a business owner, understanding flat-rate bias can help you design pricing that customers love — but also one that's profitable. The key is to set the flat rate just high enough that heavy users subsidize light users, but not so high that light users feel ripped off. Luna: It's a delicate balance. Lucas: It is. And it's why we see so many variations — tiered plans, family plans, annual vs monthly. Each one is an attempt to capture different segments of the flat-rate bias. Luna: If walking through the economy with us has made something click, and you want to help us keep these episodes ad-free, you can support the show at buy me a coffee dot com slash fexingo. Lucas: It really does make a difference — and it keeps us independent. Luna: Back to the topic — one more example I want to touch on is the rise of 'all-you-can-eat' in digital media. Think about music streaming. Lucas: Right. Spotify's flat-rate model completely changed how we consume music. Before, you'd buy individual albums or songs. Now, for $10 a month, you have access to millions of tracks. And the bias here is that most people listen to a relatively small library — but the flat rate feels like a steal because of the potential access. Luna: And once you're in, you rarely leave, because canceling feels like losing access to the entire universe of music. Lucas: Exactly. The flat rate creates a sense of abundance, and we hate to give that up. That's why retention is so high for these services. Luna: So the flat-rate bias is really about our fear of missing out on potential value. Lucas: It's a combination of loss aversion — we don't want to lose access — and the endowment effect — once we have it, we value it more. Plus the pain of paying is eliminated. It's a triple whammy. Luna: So next time you're about to click 'subscribe' on that premium plan, maybe ask yourself: am I buying access, or am I buying the illusion of access? Lucas: And if you're honest, you might just save yourself some money. I'm Lucas. Luna: And I'm Luna. Thanks for thinking with us.