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Cash, Credit, and Consumer Buying Decisions

A Guest Post from David Rodwell –

It’s been demonstrated over and over again that businesses which accept credit cards bring in more revenue than businesses that don’t. While the underlying assumption here is that accepting credit cards brings in customers who wouldn’t otherwise patronize a given business, there is another factor at work here. According to some recent research by Professors Promothesh Chatterjee and Randall Rose of the University of Kansas and the University of South Carolina respectively, credit card customers actually spend more than cash customers.
Here are some of the findings in their research about why credit card customers were likely to spend more than cash customers:

  • Cash customers were more concerned about price at every level. In the research process, customers that were primed to use cash were more concerned about cost than they were about benefits. This extends to every area of cost, including things like delivery and installation costs, as well as warranty costs.
  • Credit card customers were more concerned about features. In contrast, credit card customers were more concerned about the features of a given purchase. As such, they had greater recall of a list of features, and relatively poor recall of cost-related information. They weren’t concerned with things like delivery, installation, or warranty costs.
  • Credit card customers were more likely to make a decision based on status and image. Brand became a lot more important to credit card customers. They were more likely to focus on the benefits of a given purchase, even beyond the actual product benefits. They were also more likely to make frivolous buying decisions, and buy high-profile products.
  • Cash customers tended to miss out on benefits. While it may sound like paying cash is always a better idea because you’ll get a better price, this isn’t always the case. Cash customers had poor recall when it came to understanding benefits in a product comparison. That means if you need to make a purchase of something that has to be effective, accurate, or durable, paying cash may actually impede that process.
  • Consumers can be primed to use credit. There are a number of ways that businesses can actually prime customers to use credit, thereby increasing transaction amounts. For example, placing credit card signage at the door and at the register, or offering store credit offers in the store can sway those people whose payment method was undecided toward using a credit card.

These findings are interesting on several levels. For one, the fact that your intended payment method actually affects your memory and ability to recall certain information is truly interesting.
Add to that the idea that the researchers put forward that the “pain of payment” – that is, the immediate recognition that a given purchase’s cost has reduced your money – is almost nonexistent with credit card purchases. The payment is often separated from the purchase by weeks, whereas cash customers immediately get to watch their reserves drop when they spend.
There are several lessons to be learned here, not the least of which is that a cautious consumer carefully chooses her payment method based on what she’s hoping to get out of a purchase.
David Rodwell is a seasoned writer in business and personal finance, taking a particular interest in payment processing. You can find more of his articles located at CreditCardProcessing.net.

  • JOE July 10, 2012, 11:03 am

    Interesting question. I suspect that a part of the issue is that any symbol for cash ‘feels’ different than actual green money. So a debit card would feel the same, to me, anyway. I’ve believed that since I budget for what I can pay in full each month, that the card doesn’t impact my spending. But of course, I may just be kidding myself.

  • Smart Military Money July 10, 2012, 10:17 am

    I wonder how people with debit cards would fit into this study. Since consumers likely have a ballpark of how much money they have in a checking account, debit cards are pretty much the common ground between credit cards and cash.

    How do you think debit cards affect consumer behavior monitored in this study?

    -Christian L.

  • Smart Military Money July 10, 2012, 12:24 pm

    I’d agree with you. Also, you’re not kidding yourself. There have been quite a few studies suggesting that people who make purchases with credit cards are more distanced from the fact that they spent money. Cards have other effects, too.

    I remember writing about research that found when people sign a receipt after using a card, they’re more likely to go to a store they like and buy something for themselves.

    Also, check our blog Thursday or Friday this week. I’m featuring this piece in our weekly roundup!

    -Christian L.

  • Banner July 11, 2012, 12:49 am

    Wow… Meaningful comparison between Credit cards users benefit and cash cards users benefit. Really cash card users have gotten more benefit then the credit cards users according to Professors Promothesh Chatterjee and Randall Rose. Thanks for good dealing!

  • David Rodwell July 17, 2012, 7:28 pm

    It would make for an interesting study to observe the difference in spending habits between cash and debit cards! I assume that debit card holders are more cognizant of how much is in their checking account and would thus act accordingly when making purchases as to avoid overdraft fees or embarrassing declines.

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