02 July, 2018

How to violate every rule in pricing behaviour – and get away with it

Recently I traveled to the US to attend an international tourism research conference. I encountered a pricing behavior of the tourism industry which I have been familiar with for some time. However, it has never ever upset me as much as this time (I shall not use the p…o… word in public).

Having stayed in a US lodging establishment lately? Well, we all know that you end up with much higher costs than the price posted at the time of booking. Taxes and fees can add a hefty cost to your accommodation. As only death and taxes are for sure, we have learned to cope with taxes as an “add-on”, mostly because it is imposed exogenously, from outside of the realm of the accommodation provider, who is, as the consumer, “victim” of taxation.

However, there is another increasingly widespread “fee”: The so-called resort fee (or whatever you call it). With that fee, you essentially must - in addition to paying your overnight - cover for the use of resort premises such as pool, spa, and the like, and for whatever the fantasy of the accommodation providers shall amalgamate into such a contribution. When I say “must”, I mean “must”, as there is no way that you can evade such a fee. Hence you pay compulsory for something you potentially could make a discretionary choice, i.e. use such premises or not. However, the provider does not allow such a choice. Oh, and by the way, those fees quickly exceed 10-20 per cent of the price you pay for lodging.

Why do I bring up this topic? Because it is a great example of how one can violate any pricing rules and get away with it. Rules hereby stand for pricing fairness as well as legal issues.

Pricing fairness, because one cannot evade such fees, which is why they should be integrated in the price you pay for the accommodation. From the prospect theory by Nobel price laureates Kahneman and Tversky we know, that losses should be integrated (because consumers might not like to renounce from using certain services), and gains be segregated; segregation hereby means that consumers must be provided with an actual choice to buy or not to buy. In our specific case, this situation is not given.

Legal issues, because modern competition and consumer protection regulation (such as prevalent, e.g., in the European Union) clearly prescribes that prices of all non-discretionary service components need to be included in a posted price. This does however not include services which the consumer may buy (but is not forced to). The rationale for such a regulation is quite simple: transparency in a market of potentially very different providers.

We could actually extend this discussion also towards services charges, tips, sales taxes and other tourist taxes in most countries of this world…

Different industries have reacted differently and sometimes quite innovative to this regulation: airlines, e.g., try to generate additional income by ancillary services, services which notably and formerly might have been included in a standard bundle. But this standard bundle does not exist anymore; we increasingly find multiple standard bundles as default to help consumers form their own customized bundle (which are then priced very differently).

Now, and to get back to the resort fees: why do they get away with it?

One might argue that – as mentioned before - we are in the time of unbundling and this is one of its results. Hence, we better shall get used to it. I would counter argue, that due to the obligation character of such fees, this has nothing to do with unbundling but just with asking multiple additive prices for one and the same thing. This behavior creates the worst, because dual type of intransparancy:

  • There is a first type of intransparancy about what you get when you buy something according to a posted price.

  • The second type of intransparancy stems from the fact that you might have to pay for something additionally you do not want or need. Sure, all those buying conditions will somewhere be mentioned in the general terms of service – in such a way that no reasonable consumer would ever read it (why would somebody spend 15 minutes for reading the GTS in a booking process that might take 2 minutes?).

I classify this pricing behavior as borderline cynic, because it builds on incapacitating the customers. Why? Because providers lure them with an initial attractive pricing signal, with the intention that they make an initial and sometimes irrevocable purchase decision. Once customers have made this decision, the providers get (rip?) out of them as much as they can. As customers are used to this type of “business model” (cf. additive compulsory costs, such as service fees, tips, taxes, name any other surprises which come to your mind), they will not complain.

That’s why they get away with it.

What is the answer of the rest of the world?

Let us invite and welcome US tourists to our world of service and price transparency, where you know what you get for your money, with no strings attached.

No comments:

Post a Comment

Thanks for sharing your thought!