Hidden fees

Posted by Flux on 

30 October 2023

This observation is a follow-on from Hide-and-seek Pricing.

What’s trending?

Retailers have not fully recovered financially from the pandemic so there are efforts to maximise profits without raising the prices of goods and services. Some of them achieve this through hidden costs, where the advertised costs are not what the consumer ends up paying. Hotels and airlines are increasingly resorting to adding ‘junk fees’ to their prices, unexpected charges that are not included in the initial or listed price. Some US airlines are even now charging extra for family members to sit together. Buy Now Pay Later (BNPL) schemes are another area where costs are hidden. BNPL firms advertise themselves as risk-free credit options – but it’s only free if you make your payments on time. When consumers default, they may incur costly hidden fees and exorbitant interest rates. Other businesses are opting for surge pricing where the price fluctuates based on demand. Also known as dynamic pricing, it’s  been around for ages in the airline and hotel industry. Consumers have grown accustomed to it in these sectors. The practice, however, seems to be spreading to other more essential goods, like food items. A British pub Coach House in central London announced that it would charge pub goers 20p extra for a pint of beer on busy evenings and weekends. This announcement made news headlines and angered regulars. 

Why is it important?

In the instances mentioned above, consumers are left feeling as if they’ve been treated less than fairly and this subsequently erodes trust in these retailers and damages their relationships. This is more than likely to translate into a drop in revenue, which is ironically what these methods are trying to avoid. Aside from losing loyal customers, there is also the danger of these customers shaming the company in public and causing reputational damage. Surge pricing is legal, but questions remain about the ethics of this practice, especially with regards to essential items such as groceries. Junk fees and BNPL remains a largely unregulated space but there are moves towards enforcing rules to protect consumers. The Biden administration in the US is cracking down on ‘junk’ fees for example. In South Africa, from a regulatory perspective, BNPL models fall outside the ambit of the National Credit Act, 2005 legislation designed to protect the consumer in the credit market. 

What can businesses do about it?

It’s key that businesses ensure they are upfront about all their fees. In the case of junk fees, businesses should make sure that their ‘hidden’ fees are either prominently displayed or not hidden within their marketing materials. If the extra costs are significant, then consumers will feel duped and may abandon the sale and, even worse, never return. In the case of BNPL, transparency is also vital. Salespeople should be trained to advise customers at the point of sale of the costs if they default. Online, there could be a pop-up window where customers are educated on the pitfalls before they make a purchase. For surge pricing, businesses should emphasise that while prices are high during peak times, they are low during off-peak periods, allowing access to those who can’t afford the peak prices. Transparency and clear communication is essential for building and sustaining a strong relationship with customers. “The question is making sure there’s no secondary effect, like people getting pissed off and not understanding [the pricing method].The devil is in how it’s communicated because you’re trying to get this customer to come back tomorrow,” said Marco Bertini, professor of marketing at Esade business school in Barcelona. 

By Faeeza Khan

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