The sneaky pricing tactic we hate but still fall for

Imagine this: you’re planning a getaway, and you find what seems like an incredible hotel deal. The room you’ve been eyeing is an enticingly low price of $99 per night. Excitedly, you proceed to book it, only to find out during the checkout process that a service fee of $15, a cleaning fee of $25 and a couple of other mysterious charges suddenly inflate your bill. When you reach the final price, that amazing offer has morphed into something far less appealing.

This is the common pricing tactic known as drip pricing. The original price that you see is very attractive, but hidden fees appear as you click through the purchase.

For Ralf Steinhauser, senior research fellow at the Australian National University’s Centre for Social Research Methods, drip pricing is particularly annoying. He knows exactly what’s going on but is largely powerless to do anything about it.

Last year, both US President Joe Biden and British Prime Minister Rishi Sunak have committed to combatting drip pricing. India recently followed suit. And in 2022, Canada passed laws prohibiting certain types of drip pricing.

Here, the Australian Competition and Consumer Commission (ACCC) has made some moves to push firms to be more careful about how they display their extra fees and charges.

However, since drip pricing is continually morphing and transforming, regulators worldwide have a challenge. Additionally, economists aren’t in agreement on how to define drip pricing – even if they know it when they encounter it. This ambiguity in definition makes it harder to regulate.

The psychology behind drip pricing

The anchoring effect

Drip pricing preys on human psychology in several ways. First and foremost, it capitalises on the anchoring effect. The initial low price serves as an anchor, setting a reference point for consumers. They mentally commit to the purchase based on this attractive starting point making it more difficult for them to abandon their shopping carts as additional costs are revealed.

Present-bias preference

The reluctance to restart the search isn’t solely a result of laziness or indecision. It’s underpinned by a psychological mechanism known as present-bias preference. This concept means that we value things immediately in front of us more than things more distant in the future.

Drip pricing exploits this cognitive bias by getting you to make a decision and commit to the transaction process. If you’re far into a complicated booking process when extra fees appear, starting all over again feels like a burden. Often enough, this means you’ll settle for the higher-priced hotel room.

Sunk-cost fallacy

The sunk-cost fallacy is a related concept. If companies strategically use obstacles and complexities in the online checkout process, it discourages customers from abandoning their transactions even after discovering the true cost. This is because individuals have already invested their time and effort and are reluctant to waste or discard it. “Starting all over feels like a huge task and you just don’t want to do that,” says Mr Steinhauser.

Loss aversion

Drip pricing doesn’t just capitalise on our desire for immediate gratification; it also preys on our instinctive fear of missing out. Loss aversion is another psychological factor manipulated by drip pricing.

It’s the notion that we feel more pain from losing something than pleasure from gaining the same thing.

Does drip pricing need more regulation?

Cost of living concerns in the UK have put drip pricing into sharp focus. Last June, Rishi Sunak ordered an inquiry by his government’s Department of Business and Trade to get a sense of how widespread and how damaging it might be. Britain’s Office of Fair Trading has found there is “no pricing scheme more pernicious than drip pricing”.

Since 2022, the Biden administration has been in ongoing war over drip pricing, or ‘junk fees’. “I know how unfair it feels when a company overcharges you and gets away with it. Not anymore,” said President Biden in June.

He is now urging Congress to pass his Junk Fees Prevention Act. If successful, it would work to eliminate service charges and other fees on online ticket sales for concerts and events. It would also eliminate airline seat booking fees for families travelling together. Resort fees tacked onto bookings for online hotel reservations for basics such as pool towels would also be eliminated.

Drip pricing in Australia

Australia doesn’t have any specific laws against drip pricing. It is tackled using broader regulations against misleading conduct and component pricing. At the moment it is limited to fees that are mandatory and quantifiable, such as credit card surcharges. Technically, by law companies must display any charge that is unavoidable as prominently as the advertised initial price. “Businesses must be upfront and clearly disclose to consumers at the start of a purchasing process the types of fees that will apply and when,” the ACCC told The Sydney Morning Herald. 

Sometimes, a company may claim that it cannot accurately calculate additional charges until a purchaser has progressed through most of the checkout process.

However, a spokesperson from the ACCC said: “Even when a mandatory charge is not quantifiable at the start of a transaction, businesses must disclose to consumers that an additional charge exists and will be added to the total cost once the transaction is finalised.”

Unfortunately, drip pricing and its associated tactics will undoubtedly continue to evolve, and loopholes will remain. Your best defence is to make well-informed decisions by understanding the reasons behind the effectiveness of this tactic. While bargains may initially capture your attention, you can equip yourself with the knowledge needed to avoid hidden costs.

How often do you purchase things online? Have you been caught out by drip pricing? Let us know in the comments section below.

Also read: How online retailers trick you into spending more

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