Often posters on hotcopper seem to be surprised when provided with evidence/argument that suggests Afterpay is used only by people who can't afford items. The following article provides some very interesting insights into the psychology of consumers and shines a light on why this product has resonated so well with customers.
Note that the article references people buying something outside their budget or something outside their "perceived" budget. Research has shown that Afterpay users are more budget-savy and higher paid than non-Afterpay users (I'll be addressing that research in a separate post as it comes up a fair bit) and that means anyone who has set themselves a monthly budget for discretionary items (like myself) has reason to use the service, regardless of income.
I'd encourage holders, and non-holders to read the following article because in my opinion Afterpay's full potential cannot be fully appreciated without understanding this content.
Psychologically speaking
Speaking to SmartCompany, Dr Billy Sung, a senior lecturer at the School of Marketing at Curtin Business School, says when we’re considering why BNPL has been growing in popularity, much of it comes down to psychology.
Research has shown that the area of the brain that’s activated when you feel physical pain is the same that’s activated when you part with your hard-earned cash.
Sung explains what he calls the “bottom-dollar effect”.
If you buy a product that’s out of your budget — or out of your perceived budget — when you consume that product or service, “you derive much less satisfaction”, he says.
“A purchase that’s outside of someone’s usual budget actually makes that product or that service, when you’re consuming it, less satisfying,” he adds.
“The consumer learns from this, psychologically.”
So, if you pay from something incrementally, it’s more likely to feel more reasonable within your weekly budget.
When you consume it, that makes it all the more satisfying.
“That’s one of the drivers of why [BNPL] is so popular,” Sung says.
“Psychologically speaking, the pain of paying is much less.”
Of course, the same logic could be applied to credit card payments. Again, the consumer doesn’t pay off the full amount straight away.
But, there’s a big difference, Sung says. Namely, compound interest.
“There’s a risk that’s associated,” he explains.
“If I can’t pay off this debt then I will have certain compound interest.”
Therein lies the unique value proposition for BNPL. You’re not paying cash — the most psychologically painful way to purchase — but there’s not as much risk attached as there is with credit card payments.
But there’s yet more psychological tricks at work here. The amount of time between purchasing the product and paying for it also affects the way you feel towards that product, Sung says.
The longer the gap between consuming the product and paying for it, the less satisfied you become.
BNPL strikes a balance between the pain of paying upfront, and the dissatisfaction of paying much later.
“It’s not even positioned as a debt. You’re paying off that product incrementally,” he says.
Of course, during COVID-19, we’re also seeing people purchase more online. Again, that takes the consumer one more step away from the perceived pain of payment. But, it also reduces friction in the very process of signing up to a BNPL provider in the first place.
There’s no standing around awkwardly in a store while you fill in forms and wait for approval, he notes.
“Because of digital consumption, that process becomes much easier,” he says.
“The retailers and the marketers have done a very good job in removing some of the pain-points, and COVID-19 definitely has sped that up simply because it makes us more reliant on these digital platforms.”
