NEW YORK, NY – As consumers continue to struggle with hidden fees added to purchases on platforms like Ticketmaster, or for booking flights, Airbnbs, and hotels, there is a renewed interest in taking action to add transparency to this process. Columbia Business School Professor Vicki Morwitz, who has pioneered groundbreaking research on these fees, spoke at the White House discussion on the Economic Case for the President’s Initiative on Junk Fees on March 21 and discussed the psychological effects partitioned and drip pricing have on consumers.
"You can tell consumers to be careful of hidden fees, but it’s hard because of the psychology of how people process information," said Professor Vicki Morwitz, the Bruce Greenwald Professor of Business. "It’s not because consumers are careless, it’s because they’re human. The burden for protection against these hidden, difficult costs shouldn’t fall completely to the customer. It’s essential for the government to look at how to make these fees more visible for consumers."
Hidden fees are rampant as more businesses choose against charging a single, all-inclusive price – shielding the true cost of a product from customers in a way that can be predatory. Professor Morwitz has specifically studied two practices that are under review by the White House: partitioned pricing and drip pricing.
- In partitioned pricing, companies deliberately split a product’s price into a base price and one or more mandatory surcharges. For example, some hotels add a mandatory fee that ranges from $20 to over $50 a night on top of the daily room rate for things like towels or pool access, or cleaning fees added to the total Airbnb costs.
- In drip pricing, companies advertise only part of a product’s price up front and reveal other charges later as shoppers go through the buying process. Drip pricing is commonly used in ticketing, such as when a consumer shops for a concert, a play, or a baseball game with Ticketmaster. After selecting a seat displayed at one price, the consumer might come to learn as they continue shopping and clicking through more steps that there is also a service fee, an order processing fee, a convenience fee, and a ticket delivery fee, even if the ticket is sent electronically.
In Professor Morwitz’s testimony for the White House conference, she makes two key points:
- Consumers Benefit When Companies Display One All-Inclusive Price. “When firms separate out mandatory surcharges versus assessing one all-inclusive price, consumers tend to underestimate the total price they will have to pay and are often more likely to complete the purchase. This happens even when the surcharges are fully disclosed. And these effects are larger when the surcharges are made difficult to process such as when they are framed as a percent of the base price vs. a flat dollar amount, or when they are hidden in the small print.”
- Drip Pricing and Partitioned Pricing Lure Customers into a Sale, Maximizing a Company’s Profits. “These pricing strategies lead consumers to make decisions that differ from what they intended and that are against their own interest. I believe that firms will increasingly turn to practices like these, and that enhanced technology and better data and prediction models, will help firms to refine them in ways that will further increase their own profits, but to the detriment of consumers. The consequence will be that consumers will end up making choices that do not reflect their true desires or preferences and will end up spending more money than they intended and than they needed to.”
Professor Morwitz has studied the effects of hidden prices for years, and in 2020 she was the co-author of the published study, Consumer Reactions to Drip Pricing. In the seminal study, Professor Morwitz and her fellow researchers examine how drip pricing affects consumer choice and satisfaction. Across six studies, they found that when optional surcharges are dripped as opposed to revealed up front, consumers are more likely to select a lower base priced option which, after surcharges are included, is often more expensive than the alternative.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit business.columbia.edu.
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