Pricing strategy has a well-established place in the library of management practices. Setting the right price, or even better, set of prices, is an important way for a business to maximize its revenue and/or profit. What gets less attention is the consumer psychology of price setting, i.e., the “how, when, where, and in what form” of pricing. We can decide that $1000 is the right price for a product, but many important pricing issues remain. Should it be paid as a lump sum, or installments? Should it be paid up-front, or at the conclusion of a contract? Should we sell the product individually, or bundle multiple products under the umbrella of a single price? The answers to each of these questions can have a significant impact on a customer’s perception of price, and therefore on his or her perceived value of our product and likelihood to purchase.

Harvard Business School Working Knowledge interviews professor John Gourville about his research into these psychological aspects of price setting. Here’s an excerpt:

Q: You talk about sunk cost, the idea that people will use a product or service more right after they pay for it. How can companies make this work for them?

A: Sunk costs are a curious bit of psychology. Economists say that attending to sunk costs is not rational—when considering whether to go to a play or attend a football game, the amount of money you spent on the tickets should be irrelevant to the decision to go. The only things that should matter are the costs not yet incurred, such as cost and hassle of driving, and the benefits to be consumed, such as the enjoyment of the game. At the same time, almost everyone pays attention to sunk costs. We go to plays or concerts that, in retrospect, we’d rather not go to simply because we have a $50 ticket in the pocket.

Similarly, one of my colleagues describes a person who pays $300 to join a tennis club, only to come down with tennis elbow. Nevertheless, he continues to play in spite of the pain, reasoning, “I don’t want to let my $300 go to waste.” And some people even count on their own irrationality and buy season tickets to a play or symphony series, knowing that it will force them to get out of the house.

Is any of this rational? No. Is it a good thing? That’s tougher to say. If people are happier to attend to sunk costs than to let the money spent on an item “go to waste,” perhaps it’s a good thing. Can it be used by companies to influence consumers’ behavior? Absolutely.

Take your average health club. It faces two tasks: getting people to join and getting people to renew. (The churn at health clubs can exceed 50 percent.) Knowing that members are going to be more likely to renew in year two if they feel that they have “gotten their money’s worth” in year one, a club should look to encourage attendance. One way to do this is through the timing of payments. Many clubs demand payment in full at the start of a year-long membership. The result is that people work out a lot in the first month or two, while that payment is still fresh in their minds, but gradually stop going as the payment fades from memory. In this case, the sunk cost effect weakens the further one is from that initial payment. Now consider the member who makes payments monthly. For him or her, the cost of membership will always be vivid and they will feel obliged to work out on an ongoing basis. At the end of the year, who is more likely to renew? Clearly, the person who worked out regularly will have a higher likelihood of renewing his or her membership.

The same concept can be applied to health care. In its current form, most of us pay for blanket health care coverage that entitles us to a number of periodic services such as checkups, shots, mammograms, etc. The problem is that the costs of these benefits are not particularly clear. I don’t know what that annual checkup is costing me, so I don’t perceive it as a cost. If health care providers could make the costs of these procedures more salient—perhaps by sending me periodic reminders that these procedures are costing me, say, $50 each regardless of whether I use them—they would be able to tap into the sunk cost effect. Patients would be more likely to say, “I’m paying for it, I shouldn’t let it go to waste.”

Read more: Use the Psychology of Pricing To Keep Customers Returning