by Tracey Lindeman
Published in the Macleans on Jan. 2, 2016
I wrote my first piece for Maclean’s earlier this year on the subject of drip pricing. Originally motivated by a $12 service fee on a concert ticket, I set out to find out more about this pricing strategy that has taken hold of the entertainment, sports and travel industries.
When Xianjun Geng checked into his San Francisco hotel one evening a few years ago, he thought he’d gotten a great deal. He’d booked the room on a discount-hotel website and had driven down the Pacific Coast from Seattle, then his home, to the city by the bay. “It was a fantastic price. I was very happy,” Geng says. Upon arrival, however, he met with additional fees at the check-in counter; $40 for parking and another $18 for Internet access for a single night. That $80-a-night room ended up costing him $140.
So Geng, a business professor at the University of Texas at Dallas, did what any academic would do: He researched. Over the course of several years of work on the subject, he has published two journal articles on the phenomenon he came to know as add-on pricing or, as it’s better known, drip pricing. He found it everywhere. No-frills carriers such as Spirit Airlines in the United States and Ryanair in Europe appear to be the biggest perpetrators of the drip-pricing scheme, followed by hotels, banks, cellphone providers, car-rental agencies and more.
“We get worse service than we’ve arguably ever had, and we pay more for it than ever.”
Since Geng published his study, things have only gotten worse. As anyone who has bought a concert ticket in recent memory knows, add-on charges don’t end there. This writer purchased $59 worth of tickets to a St. Patrick’s Day concert in Boston through Live Nation, and ended up paying $26 extra in service charges—almost 50 per cent—for a ticket purchased online and printed at home on a personal printer.
Canadians now expect to pay fees for almost everything: paper-bill fees, convenience ticketing fees, delivery fees, cancellation fees. There are fees to pay fines—paying a parking ticket by phone or online will cost you between $1.50 and $3 in most cities—and fees to pay fees, like the $75 fee the University of Winnipeg charges students to pay their tuition with a credit card online. Some unbranded ATMs now charge as much as $5 for a transaction in addition to the fee leveraged by banks for using an out-of-network machine, and many goods and service providers charge a credit-card processing fee. Stand around a water cooler long enough and the conversation will turn to fee gouging. One customer says she racked up close to $300 in banking fees over three months, after her bank, Toronto-Dominion, doubled the minimum-balance requirement on an account she’d held for 20-odd years. In short, we get worse service than we’ve arguably ever had, and we pay more for it than ever.
At a time when most services cost pennies to administer online, how is it “convenience” fees have risen dramatically? There’s no particular origin story to drip pricing, says Shelley Santana, a marketing professor at Harvard Business School and a drip-pricing expert. Like a leaky faucet, it’s been dripping away in the background for years. The big jump may have happened in 2008, when American Airlines became the first to charge a baggage fee. In truth, though, add-on fees had started earlier in the decade when legacy carriers began charging for previously complimentary meals and snacks.
“Airlines are looked at as the poster child for drip pricing. They started baggage fees and, seeing that that was a very lucrative revenue stream for them, you saw an increase in other fees being added,” says Santana, who has co-authored a number of journal articles on the subject. From there it was an easy transition to fuel surcharges, extra legroom fees, early boarding fees, even boarding-pass printing fees. Spirit Airlines now charges carry-on fees for anything larger than a purse or a small backpack, and WestJet will start charging for checked bags on international economy fares.
Consumers may feel cheated when confronted with additional costs, but Santana argues there’s a case to be made that this form of pricing—in at least some of its applications —is actually the most democratic way to price a product or service. “You are getting what you pay for. You’re not subsidizing anyone else,” she says.
In other cases, though, add-on charges are like a tip—only mandatory. Drip pricing offers a way to charge more without the bad optics of raising prices, an attractive option for businesses. Ticketmaster, owned by Live Nation and the dominant ticketing service in sports and entertainment, is perhaps one of the most egregious of offenders. It charges service fees ranging from eight to upwards of 20 per cent of the face value of a ticket, and sometimes more. Consumers aren’t given a cheaper option to buy tickets—a take-it-or-leave-it approach that has led critics to label Ticketmaster monopolistic; in the last 20 years, the company has successfully fought several antitrust lawsuits and federal investigations. (Ticketmaster declined to comment.)
As more services move online, more instances of drip pricing appear, making that drip seem more like a gush. But why? Online transactions presumably cost businesses less—they mean fewer staff, and fewer bricks-and-mortar locations to service customers.
Service charges may reflect the cost of, well, providing service. The Wall Street Journal says debit-card withdrawals at the ATM are down by 41 per cent this decade in the U.S., in part due to the growth of online and in-store card use. If fewer people are using ATM terminals, but it costs the company just as much to maintain them, logic would dictate the companies are making up the difference by charging higher fees. In a 2014 report, the Financial Consumer Agency of Canada concluded that low-cost and no-fee accounts are growing in favour among Canadians. However, the trade-off for no-fee, unlimited-transaction chequing accounts like those offered by Tangerine or President’s Choice Financial is that those banks have no bricks-and-mortar branches of their own. While some other banks’ low-cost accounts may only cost $4 a month, customers have to keep their monthly account transactions to a skeletal minimum to fully enjoy the benefits of such an account.
Or take the service fees charged on concert or sports tickets. Bob Bowman, president and CEO of MLB Advanced Media, says those fees reflect the cost of the technology it takes to be compatible with every popular operating system on the market. “The notion that technology is a one-and-done is laughable. Technology, for good or for ill, is expensive and it is a never-ending investment,” he says. From where he sits, fees represent to customers the true cost of the technology needed for mobile and print-at-home ticketing: The scanners and ballpark turnstiles it rents from Ticketmaster, as well as apps and native mobile purchasing mechanisms, and human labour—in other words, the cost of convenience. “This is what fans of everything—concerts, live events, sporting events—have come to accept, and it just doesn’t make sense to change what fans are accepting,” Bowman adds.
Now that consumers have accepted it, partitioned pricing will probably never go away. Canadians with Bell telephone landlines still pay a $2.80 monthly fee to have Touch-Tone service even now, 55 years after phones with push-button numbers were introduced to the market. (The Touch-Tone fee recently disappeared from Bell’s bills, but it’s still there; it’s just not itemized anymore.) Just as airlines still charge fuel surcharges though oil prices have bottomed out, the precedent for businesses to pass on to consumers the costs of doing business has been set.
“This is what fans of everything— concerts, live events, sporting events —have come to accept, and it just doesn’t make sense to change what fans are accepting.”
“I hope that firms will realize that consumers prefer simple and straightforward pricing to pricing that they do not understand,” says Vicki Morwitz, a professor of marketing at the Stern School of Business at New York University. “While consumers may be fooled once by paying for an unexpected surcharge because they do not want to have to begin their shopping all over or admit that they made a mistake, they will be less likely to want to do business again with a firm they feel tricked them into paying more than they thought they should.”
Consumers are fighting back by lobbying for more legislation, filing class-action lawsuits and punishing ﬁrms with negative online reviews, she continues. Consumers won one battle last spring when the Royal Bank of Canada backed off its plan to introduce pay-to-pay transaction fees for investment contributions and some mortgage, loan and credit-card payments. Still, Canadian banks have managed to pull in billions by nickel-and-diming customers on service fees—in 2014, TD took in $2.15 billion in service fees, or about 11 per cent of its total revenue. In 2015, the six biggest Canadian banks made a collective $35 billion in total earnings—up a full $1.5 billion from 2014, thanks in large part to banking fees.
As for drip pricing, it’s technically legal, but in 2013 the Competition Bureau of Canada filed legal action against furniture stores Leon’s and the Brick, claiming their buy-now-pay-later schemes are “deceptive marketing practices.”
Santana says she can see a future where certain add-ons are bundled—say, extra legroom, an alcoholic beverage and early boarding for $100—to give airline travellers better value for their extra dollars. In the meantime, what is clear, at least from anecdotal stories, is that consumers are fed up with a pricing strategy based on whether they are smart enough to notice they’re being taken advantage of.