March 17

[Nugget #25] Drip Pricing: The Dark Side of the Pricing Force

Everyone loves surprises: But what about surprising with additional fees?

You probably have had the same experience in the past.

You look for an airline ticket, a hotel room, or a new electronic gimmick. You find a very attractive price on an online website. Thrilled about this bargain, you click through your customer journey from page to page just to find that charges apply that you expected to be included: for example, for being allowed to bring your luggage with you on your flight, for Wifi in your hotel room, or shipping the items you just bought to your place.

Not so much thrilled anymore, what do you do, and how do you feel?

  • Do you start over and look somewhere else? 
  • How confident are you that you financially made the right decision?
  • How satisfied are you with your buying decision?

This practice of showing only parts of the final price upfront (e.g., a base price) and letting them know about additional fees and surcharges in a piecemeal way is called “drip pricing.”

In a recent paper (Santana/Dallas/Morwitz 2020), researchers looked into buying decisions of consumers and the consumers' subsequent satisfaction with their decisions.

The research team gave participants in various experiments the option to choose between a product at a lower base price and a similar product at a higher base price. The participants were informed that the lower base option might come with optional surcharges for add-on services already included in the higher base price option. Consumers chose the initial base price option and added various add-on options in subsequent steps.

The researchers randomly assigned participants to a drip condition (prices for add-ons were revealed after the initial base price choice was made) or to a nondrip condition (fees for add-ons were presented next to the base prices in the initial choice).

Participants in this experiment could start over again and received an incentive to spend less money on their buying decision.

What did consumers actually do? 

First, when the price was dripped, more customers ultimately chose the lower base price and additional, optional charges (after deciding to start over). The share of customers who chose the lower base price ranged between 16.4% and 41.8% in the drip condition compared to 7.3% and 15.3% when the prices were not dripped.

Second, more customers made a financial mistake with the lower base, meaning they chose the more expensive price structure given the add-ons they chose. The share of customers making a financial mistake differed substantially between drip pricing and nondrip pricing; the percentage of financial mistakes ranged from 10.7% vs. 5.6% (i.e., 91% more) to 27.7% vs. 6.5% (i.e., 326% more). 

Third, customers who chose the lower base price (which was more likely in the drip condition) were less satisfied with their buying decision. In sum, customers exposed to drip pricing were less satisfied than their counterparts who saw a price that was not dripped. It is important to note that satisfaction was measured by asking the consumers about their intention to purchase this product again or recommending it to friends and family.

The bottom line

Drip pricing might help the bottom line in the short-term. But in the long-run, dissatisfied customers turn their back on the company, taking away future business from themselves or from future referrals.

References
Santana, S., Dallas, S. K., & Morwitz, V. G. (2020). Consumer reactions to drip pricing. Marketing Science, 39(1), 188-210.

Stock picture: Simon – stock.adobe.com


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