It was just before Christmas 2014 when Charan Bagga began using a skate rental shack in London, Ont., as a laboratory. For 10 days, the marketing professor and his research assistants from the University of Calgary Haskayne School of Business provided patrons of a nearby outdoor skating trail with equipment. Some were charged $6 per hour for skates; others were told the gear was free because of a “special promotion.” In effect, those latter individuals were just borrowing the skates, not renting them—an important distinction.
When the skaters returned, Bagga's team asked them a series of questions. The most important concerned their “willingness to pay” (WTP in psychology speak), or how much they would pay to buy the skates. Those who rented them had an average WTP of $38.97. For those who got the skates free, it was just $26.
These were intriguing findings for Bagga, who hypothesized consumers who felt a “psychological feeling” of ownership over a product would be willing to pay a higher price to eventually buy it, regardless of whether it was a pair of skates or a rent-to-own dishwasher. “If you rent an apartment for a long period of time, you can develop strong feelings of ownership toward it,” he says.
This has significant implications in an era when consumers are renting everything from power tools to Gucci handbags. Companies such as Le Tote and Rent the Runway, which both hire out high-fashion items, now compete with luxury retailers. Meanwhile, the stock price for Aaron’s, a rent-to-own home-goods chain with 1,600 locations across the U.S. and Canada, has risen from about US$25 to US$65 over the past three years.
Through further experiments, Bagga and his fellow researchers determined a feeling of ownership was indeed likely to increase a person’s WTP for an item. They also found different types of interactions—borrowing, sharing, using a product during a free trial period, renting and renting to own—triggered varying degrees of ownership feelings.
Bagga and two co-authors recently published their findings in the Journal of the Academy of Marketing Science. Among the study’s inferences, suggests Bagga, is that rent-to-own and leasing companies can hike the sense of ownership by increasing a customer’s control over the product. For instance, a car leasing company could remove monthly mileage limits. “If I can increase the feeling of ownership, then the greater the willingness to pay for that object should be,” he says. But the study ought to also serve as a warning to consumers, Bagga says. If you are pondering buying an appliance or even a home through a rent-to-own program, be wary of overpaying. “Just be aware that there are these feelings of ownership you’ve developed. Take a step back, and look at the object as if you are seeing it for the first time,” he says.
Research by the Consumers Council of Canada suggests people may use highcost financing options like rent-to-own because other alternatives, from service clubs to church groups, are harder to access these days, says Ken Whitehurst, executive director of the council. Financially strained consumers may turn to resellers like eBay, used-goods stores or the rentto-own industry. But rent-to-own customers often end up paying significantly more for an appliance or a TV than they would have if they had just purchased it outright at a retailer. “What is interesting about behavioural economics research,” says Whitehurst, “is that it is increasingly highlighting how rational economic decision making is and how it can be disrupted.” Yet, while disrupting and confusing a consumer’s decision making might mean greater short-term profits for businesses, it could eventually hurt a company.
In a separate study, Bagga found that unscrupulous deals offered by some rent-to-own operations could actually stunt the feelings of ownership, which in turn affects a consumer’s WTP. In rent-to-own evaluations, in which a high percentage of the payments went to the rental fee rather than the item’s eventual ownership, Bagga found unfairness became an issue. “For that feeling of ownership, you should first find that transaction to be fair. You should find that object to be desirable,” he says. And when it’s not, he adds, consumers tend to “walk out of these transactions, because they feel a particular company is taking them for a ride.” /Anthony A. Davis
WHEN PEOPLE ARE HAPPY TO PAY MORE
The cost of airline travel is a constant source of irritation for consumers. But travellers are willing to pay extra if the money is being used to combat climate change, according to new research from the UBC Sauder School of Business. Since it has become popular for travellers to buy offsets to mitigate the damage caused by airline travel, David Hardisty, a marketing professor, and his colleagues began testing attaching a hypothetical $14 “carbon fee” to a ticket purchase. In a survey of 1,800 respondents, the researchers found consumers would happily pay the money—if it was described correctly. Individuals consistently favoured a “carbon offset for aviation fuel production and import” over a “carbon tax for airplane travel.” The difference? People feel taxes take their money for no reason; an “offset” suggests a surcharge with a purpose. /James Cowan
YET ANOTHER REASON TO LEAVE THE OFFICE
In theory, international expansion should be easier for a company selling digital products compared with physical ones. There’s no need for overseas factories or distributors. What could be simpler than peddling online software or dropping an offering into an app store?
It turns out that going global with a digital company isn’t that straightforward, according to research out of the Ivey Business School at Western University. “When trying to go global, [digital firms] run into similar issues as traditional businesses,” says study author Maximilian Stallkamp.
One challenge is learning to navigate a new regulatory environment. Cultural constraints are another. “You may need boots on the ground to do customer service, training, sales and so on,” says Stallkamp.
It's more complicated for a digital product with a real-world component, like ride shares or delivery services.
Stallkamp interviewed a range of digital firms in North America, Europe and Asia. He found that nearly all of them had to establish a physical presence, to varying degrees, when expanding abroad. “Many successful companies bounced between the two extremes for a while before figuring out what works for them,” he says. “There’s no one-size-fits-all approach.”