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Rise of the Renter

Retailers are increasingly offering products at rental rates that are comparable to traditional purchase prices. The question is whether consumers make decisions differently when they’re looking to rent rather than buy.

On the last page of the July 22, 1904, issue of the Minneapolis Journal, the Great Western Cycle Co. placed a small boxed advertisement. It offered “Edison New Moulded Records” for 35 cents each; a 20 percent discount on bicycles; and “Automobiles for Rent”—no price named. Two pen-and-ink illustrations of cars are the notice’s only adornment. This antiquated ad reportedly marks the birth of the car rental market.

More than a century later, it is increasingly common for consumer products—movies, designer handbags, furniture, TVs, textbooks—to be offered for purchase by some retailers but for rent by others. The logic behind these parallel markets is simple: sometimes consumer demand is for just temporary ownership. What if you want to watch a movie only once? When besides prom will gangly high schoolers need a tuxedo? How long will classics majors want to keep their college calculus textbooks?

“Considerable consumer research has examined how people choose among different products,” according to Anastasiya Pocheptsova, an assistant professor at the University of Maryland and a 2008 graduate of Yale SOM’s PhD program. But, she adds, “most choice research has not distinguished between different ways in which a product can be acquired.” Pocheptsova tackled this new ground in a working paper that she coauthored with Ravi Dhar, the George Rogers Clark Professor of Management and Marketing at SOM, and Ran Kivetz, a professor of marketing at Columbia Business School. Do people make decisions differently, they asked, when renting a product rather than buying it?

The short answer is yes. The mentality of a renter is very different from that of a buyer. We have lower expectations when renting, even if an item’s purchase price is identical to its rental rate, in part due to the clear reversibility of a rental decision. When buying, we tend to expend considerably more energy looking for alternatives and comparing product information, even if the information is difficult to obtain. We also hold products we intend to purchase to higher, more stringent standards. As a result, we are more likely to rent a given product than to buy it, even if the price is exactly the same.

To test the psychological distinctions between renters and buyers, Pocheptsova and her coauthors ran a series of connected experiments. One experiment offered the same movie (on DVD) to two groups of study subjects, with one group offered a chance to rent the movie and one offered a chance to buy it—at the same price. It turned out that more people cashed in the rental offer. To make sure this wasn’t due to a general preference for rentals, a subsequent study divided the subjects into three groups: one given the option to rent or not; one given the option to buy or not; and one given the option to rent, buy, or do neither. When given the option to rent or buy, far more subjects chose to buy. Rental decisions are thus not “a result of consumers’ inherent preference for renting over buying,” explained the authors, “but rather are driven by different decision processes used when consumers are making a buying as opposed to a renting decision.”

This fact—that consumer mentalities are distinctly different when renting than when buying—is highly relevant to marketers, as it raises a number of implications. For instance, prior work has shown that offering an item at a discounted price is more effective with hedonic goods—ones with a pleasurable rather than a utilitarian purpose—because buying goods one doesn’t need requires justification. Similarly, is a discounted price more likely to encourage a decision to buy than a decision to rent, if people apply more stringent standards to purchases? A preliminary experiment found evidence for this idea: Discounts did influence decisions to purchase far more than decisions to rent. So does that mean advertisers should explicitly highlight the reversibility of purchase decisions, since most companies already allow returns? Indeed, these findings show that such a tactic might spur purchases by making them feel more like rentals and thus subject to lower standards.

Two other insights came out of the team’s work: Because people tend to analyze purchase decisions more thoroughly than rental decisions, a company’s credibility may be a more important variable for buyers than for renters. And renters, but not buyers, mentioned a relatively peripheral feature—the attractiveness of a product’s advertising—as a significant factor in their decision of whether or not to rent.

Amid every facet of this study, a single note played continuously: Products are increasingly available for rent, which means that people who once made purchases are now opting to rent instead. For the marketing world, this is not a negligible shift. Long after the first rental cars puttered along the roads of Minneapolis, there is now clearly a need for better understanding of renters’ decision-making processes.

Department: Research