Of particular interest is the part where the findings show that people routinely overpay and/or buy more when pricing is broken into chunks instead of aggregated into a single simple price. So I guess we can thank ourselves for being morons when it comes to simple math and the psychological impact on our decisions. The last paragraph might be my favorite piece: Our instincts as consumers are unfortunately the opposite: We punish transparency, think we’re clever enough to figure out any complexity, get sucked in by low offers then upgrade our ambitions, and conclude it’s too much hassle to start over. When we shop that way, we have mostly ourselves to blame. Here's the article in full: Who’s to Blame for All Those Hidden Fees? We Are Four tests show why ‘drip pricing’ is so effective at getting us to pay up Add-on fees are driving consumers crazy. From restaurants and hotels to concerts and food delivery, we are increasingly shown a low price online, only to click through and find a range of fees that yield a much higher price at checkout. Everyone says they hate these fees, but four experiments illustrate why “drip pricing,” as it’s called by researchers and regulators, is so effective at getting us to pay more. Note that this isn’t about emotional blackmail, as with tipping: Drip pricing isn’t negotiable. Nor does it explain why the cost of living might seem higher than the official data suggests: The consumer-price index reflects these fees and taxes. The experiments explain why the fees proliferate. The conclusion: Consumers themselves are to blame. “Even when we know the fees are coming, we underestimate their magnitude,” said Vicki Morwitz, a marketing professor at Columbia University who studies consumer psychology. Consumers punish transparency The term drip pricing was popularized by a 2012 Federal Trade Commission conference. Its spread is associated with the proliferation of airline fees after the Sept. 11, 2001, terrorist attacks. Yet an example of the phenomenon that long predates 2001 is stores’ practice of listing goods without the sales tax, which gets added at checkout. Why not include the sales tax with the sticker price? A 2009 paper from economist Raj Chetty, then at the University of California, Berkeley, and co-authors, showed consumers punish that sort of transparency. A grocery store let the authors tag some products with the familiar pretax price and some with the total price including tax. For example, a hair brush’s price tag showed $5.79 before tax, and beneath that $6.22 with the tax. Store managers predicted the transparency would be a disaster, and permitted the experiment for only three weeks and three product groups. The managers were right. Sales volume dropped about 8% for products with price tags that included the tax than a control group without the tax. This isn’t because shoppers didn’t know the tax rate or which items were taxable. In fact, 75% of shoppers surveyed knew the sales tax within 0.5 percentage point, and most knew what goods were taxable. So the tax-inclusive price tag didn’t give them new information; it was just that transparent reminders turned some people off. People prefer ‘costly complexity’ For several years, Abigail Sussman at the University of Chicago and colleagues have run a series of experiments asking participants to find the best deal for a range of purchases, such as wedding venues, prepaid cards, university tuition schedules, cellphone plans or home closing costs. They can then choose between complex or simplified disclosures. For example, the complex disclosure for prepaid cards breaks down the final price into things such as “initial fees,” “card acquisition fees,” “card activation fees,” “service fees” and “administration fees.” The simplified disclosure combines all these fees as a single “initial fee.” If you realized this complexity tricks you into paying more for equivalent products, you’re in the minority. Some 70% of people preferred the complex disclosure, said Sussman. They believe that it’s more transparent and that they can calculate the total cost by themselves. They’re wrong. Even when participants are offered cash to identify the cheaper option, people botch the math (costly complexity!) and pick more expensive options. Lower prices prompt shoppers to upgrade In 2013, the website StubHub, which resells event tickets, attempted to do away with hidden fees, citing research about how hated they are. Its new “all-in pricing” prominently displayed the total ticket cost from the beginning of searches. The strategy failed to boost business or attract more customers. In 2015, shortly before abandoning all-in prices, StubHub did an experiment—described several years later by economists who obtained the data—where half of shoppers saw all-in pricing, and half saw the lower base price with taxes and fees only added at the end. The latter strategy boosted revenue 20%. Shoppers didn’t just buy more tickets. When they saw lower prices initially, they opted for better seats. By the end of the checkout process, they were committed. “When people get to the end of the process, there’s a variety of psychological reasons they’re locked in,” said Morwitz. “They overestimate the cost of starting over, they underestimate the benefits.” Maybe they’re just excited about the purchase, or reluctant to admit they could have made a mistake, she said. On Thursday, two of the biggest U.S. ticket sellers, Ticketmaster and SeatGeek announced a switch to more transparent pricing. Some companies in the ticketing industry have said they would support all-in prices if they were mandated for everyone. The StubHub example shows why it’s hard for one company to buck an industrywide practice. People think fees, like taxes, don’t alter relative prices Morwitz and co-authors Shelle Santana of Bentley University and Steven Dallas of Duke University recruited people to book airlines and hotels for vacations, sometimes with rewards for finding the lowest rate. People went for the low base prices, of course. After all the additional fees were dripped on, they had the option, not to mention incentive, to start over and look for a cheaper alternative. Here’s the twist: Most opted not to, erroneously believing drip prices worked sort of like taxes, affecting the base price by a constant, fixed amount, the authors concluded in their 2020 paper for Marketing Science. It isn’t true. Drip prices can vary substantially between sellers, said Morwitz, and the lowest base price won’t necessarily be the lowest final price. “For consumers, it’s hard,” said Morwitz. “You have to look at the prices carefully, don’t make any decisions until you see the total and be willing to restart the search.” Our instincts as consumers are unfortunately the opposite: We punish transparency, think we’re clever enough to figure out any complexity, get sucked in by low offers then upgrade our ambitions, and conclude it’s too much hassle to start over. When we shop that way, we have mostly ourselves to blame.
