Pricing Metrics and the Importance of Minimum and Billing Increments

Service providers often use minimum increments and billing increments to charge for higher usage than customers’ true usage. Despite their popularity in business practice, research has largely ignored these increments and assumed that charged usage always equals true usage. We develop an overcharging index that represents the extent to which a customer is charged for units that she or he did not use and identify situations in which the overcharging index is particularly high. In three empirical studies in the highly competitive telecommunication market, we demonstrate that providers are increasingly using longer minimum and billing increments. These increments yield an average overcharge of true usage of 43.79% for customers with long increments. These increments generate additional revenues that are responsible for almost two thirds (66.2%) of the operating profits of the main providers in Germany and the United States. Customers, particularly those who are less educated, seem to not understand minimum and billing increments well, do not adjust their behavior to different increments, and often make tariff choice errors unsystematically.