The Pain of Paying – Behavioral Economics of All-Inclusives

You may have noticed an increase in the number of resorts and cruises that are moving towards a more all inclusive approach to their packages, at least aspects of additional inclusiveness (see: free drink packages, included gratuities, etc.).  There’s good reason for this, and it’s tied to the enjoyment of their guests and the overall satisfaction with the trip. But why? One interesting behavioral economics idea related to this phenomenon is called the Pain of Paying.  Today, let’s look at this topic and hopefully help you choose and love your next trip more! 

I’ll link a video from my favorite experts,  Prof. Dan Ariely (of course from my grad school alma mater Duke University) at the end of this article.  Dan is a great speaker with a number of great videos if you’re interested in behavior economics,  or just understanding why people do illogical things. 

One of Dan’s experiments involves pizza as all great science should.  But first, I’ll ask you a question, which meal would you enjoy the most? 

  1. You buy a $10 pizza with a gift card that you bought a year ago
  2. You pay $10 as you enter a restaurant for a pizza buffet
  3. You pay $10 as you leave
  4. You pay $0.50 Per bite every time you take a bite during the meal

How would your experience change based on each option? 

For many folks,  you likely would enjoy the gift card meal the most.  Why? You are separated from the actual event where you handed over money.  You may have even forgotten how you got the gift card. 

What about the pay per bite situation?  Chances are, you would take very different bites, as was the case with Dr. Ariely and his grad students (not an unexpected result, having spent 5 years as a grad student myself).   While you might be getting a better price, your experience could be so diminished that more pizza actually provided less value. 

When we talk travel, we often want to focus on the value of the experience.  Let’s think about your bar experience on many trips.  At home, most of the time you will run a tab and settle up at the end of the night,  or in some cases, pay cash as you go. Now, let’s hang out by the pool on a Carnival cruise ship.   You’ll often be pulling out your cruise card for each of those mojitos. How about an all-inclusive in Mexico with several tiers of benefits distinguished by colored wrist bands?  You typically only need to flash your wrist to get that upgraded Don Julio margarita. Lastly, let’s grab an Irish coffee on the deck of a Regent Seven Seas cruise. You grab your coffee,  and top up with a bottle of Bailey’s out Kailua just waiting for you. Or just walk up to any onboard bar on Crystal cruises and order that Grey Goose martini and relax there smiling. 

In these examples,  we started from the least expensive experience,  but the time of your beverage enjoyment was closest to the moment money (or money’s proxy in the case of your cruise card) was involved in the transaction.   You’re not doing the mental math in that moment of the exact cost and enjoyment associated with your beverage. In the case of Regent, the absolute cost is considerably higher, but the value is tremendous due to that separation from payment and the lack of a specific cost of that drink. 

On my most recent Crystal Cruise, the onboard comedian (John Joseph, who was excellent) made the comment that another passenger came up to him and said “this cruise is awesome! Have you been to the bar, all the drinks are free!” to which he responded, “yeah, if you ignore the $10k you paid to get on the ship.”  While a joke, it’s totally true! As humans, we are programmed to ignore that cost, because you made the final payment on the cruise months before! Now, it’s all enjoyment, no thinking money.

In addition to separation from the time of transaction, the form of the payment also impacts our decision and enjoyment.  When you pay for something in cash, you have a greater psychological response. You could pull out a number of paper bills, hand them to a cashier, receive an item in exchange. Your value of that item has a very specific and tangible cost, and you know it immediately.  If you pay with a credit card, you’re removed counting from the transaction, and have used a less tangible form of currency, and further delayed the funds actually being withdrawn from your bank account. That also distinguishes credit cards from debit cards, as you’ve closed the gap to actually paying with your money, but it is still psychologically easier than paying in cash. 

Casinos have known this idea for years.  Why else would they want you convert to chips or slot machine credits? They don’t want you thinking every $10 black jack bet is actually money!  Imagine you would behave differently if you were sitting at the table with a stack of $10s rather than colored chips. How would you feel each hand when you had to pull another bill off of your stack? 

Here’s another example from Dan Ariely. Think about a dinner out with friends.  You’re having a great time, the wine is flowing, you splits a few appetizers, share a dessert,  the check comes and what happens?

  1. You pass the itemized bill around and everyone calculates their exact portion 
  2. You split the check evenly dividing by number of couples/individuals
  3. One person picks up the check

Which is the most painful? Obviously A. Which is the best?  Obviously C. Why? Dan argues that option A enhances each person’s awareness of their transaction, and everyone experiences the pain of paying.  Option B is better, assuming you don’t have friends at the extreme ends of the spectrum where this feels unfair, with fewer people paying. However if you have a group of people that dine out together regularly,  taking turns picking up the bill is by far the best psychologically. Not only does everyone except the ”host” get the enjoyment of a free meal (and avoids the pain of paying), the host gets the benefit of feeling benevolent and doing something nice for his/her friends!  Literally, it’s a psychological win win! 

(P.s. I love being the host,  especially at rewards dining network restaurants using my Chase Sapphire Reserve, #SuperBonusMiles)

Back to travel,  the big cruise lines are great for a lot of reasons,  but do suffer at times from the pain of paying. While they offer the ability of diverse groups and families to turn their experiences to what they want,  it can lead to the perception of being nickel and dimed. From drinks, Ben and Jerry’s Ice Cream, and specialty restaurants, it adds a number of small moments to think about whether you actually want to pay for that.  It also leads to the dreaded last night of the cruise when your bill gets slipped under your door. I’ve definitely been on Carnival where friends faced a bill at the end for drinks, excursions, and specialty dining that was more than the initial cost of the cruise itself!

Think of airline baggage fees.  While universal at this point, the argument is that they are making is that people who don’t check a bag have to pay for a service they don’t use.  (Ignore record profits and reported amounts collected on bag fees) What does this promote in terms of behavior? People try to bring increasingly large bags onto planes, making it more difficult for them, as well as other passengers to store bags in overhead bins.  One of my favorite games is watching people bring a bag that is CLEARLY way too big for the bag sizers outside of gates onto planes look surprised when it doesn’t fit in the bin, and they have to gate check their bag.

For the opposite reason,  I love what most river cruise lines like Viking and AmaWaterways are doing,  including most of their excursions as part of the cruise fare. While the ships lack a lot of onboard activities of even smaller ocean vessels,  the reason to take a river cruise is getting up close and personal with a unique destination. I don’t want to be thinking every day whether my chosen excursion will be an interesting tour worth the added money.  Even if it is lousy (most are great, by the way), you say to yourself, “oh well, it was free. “ (we’ll discuss the psychological magic of “free” another day)

Maximizing everything we’ve talked about today,  Regent Seven Seas is the ultimate in all-inclusive.  An incredible luxury experience from start to finish, Regent includes literally everything,  from a pre-cruise night in a 5-star hotel, transfers, all meals including specialty dining,  premium drinks, excursions, and even roundtrip business class air on transcontinental trips! While the price is high,  the value is tremendous, and they epitomize maximizing your experience by making the pain of paying during your vacation absolutely vanish. 

When you book your next trip,  think about your overall enjoyment and what arrangements that we can make ahead of time to maximize your value.   Traveling Royal Caribbean, think about a drink package. Rather than getting a taxi, pre book airport transfers in a towncar and arrive in style with no pain of paying. 

How else can you think about improving your experience by eliminating the pain of paying?

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