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The hidden costs of nickel and diming
Most of us are familiar with the drill. Attracted by advertisements promising short and medium-haul flights for less than £10, we take out our diaries and schedule a few dates on which we could take a well-earned weekend mini-break. After all, it has been a few months since we last went away, and our main holiday is still some way down the line.
The moment we type our preferred destination into the airline's website, the price starts to rise. The £10 tickets are available only for mid-week flights. Then there is the seemingly endless list of taxes and charges for things like insurance, checking in luggage and paying by credit card. Before we know it, our cheap flights are costing more than £200.
Sometimes we bite the bullet and pay up a sum that was way beyond our original intentions; at others we call off the whole idea of a weekend away. Whatever our decision, we are left feeling that little bit cheated by the airline that lured us in the first place.
And the feeling is widespread. The loudest laugh of the night at a recent comedy event was for the joke about the landlord who attracted Ryanair boss Michael O'Leary into his pub with the offer of Guinness at 50p a pint - but then charged him £3.50 extra to have it served in a glass.
The practice of charging separately for extras is known as ?nickel and diming' and Hamilton et al. examine when it should and should not be used in Volume 52, Issue 1 of MIT Sloan Management Review. They argue that nickel and diming can be an advantage where comparison-shopping is widespread and consumers tend to focus on the first price they are given. Moreover, nickel and diming can make the price seem more transparent and help sellers to avoid being blamed for high prices.
However, combining charges into one total price has the advantage of hiding components such as delivery charges or a warranty. Being up-front with customers avoids surprising them later on with charges that may upset them and harm goodwill.
The authors argue that the decision a company takes may depend on many factors, including industry norms. A company that does not follow industry norms will be at a disadvantage when customers comparison-shop. But moving away from the pack by, for example, not charging passengers to check-in their baggage, can give a company a competitive edge.
Comparison shopping is when consumers seek out as much information as they can find on a product or service before deciding whether or not to buy it. In a perfect marketplace, all consumers would comparison-shop before parting with their cash, and the product offering the best value for money would emerge victorious.
In reality, of course, comparison shopping is a hit and miss affair. Consumers are often too busy, too lazy or simply too emotionally connected to a product to carry out a proper anaylsis. That is why practices such as nickel and diming achieve such prominence in the first place.
In Volume: 64 Issue 1 of the Journal of Business Research, published in January 2011, Lindsey-Mullikin and Petty examine the marketing techniques that retailers use to assure customers that their deals are bargains, and the way in which such ?bargain assurances' can change customers' shopping behaviour. The article identifies 12 common bargain assurances and examines how these practices are regulated to prevent the customer being deceived or competition being reduced.
The authors conclude that bargain assurances influence consumers and require regulation, that such regulation requires a comprehensive rather than a piecemeal approach and that consumer policy should facilitate and encourage accurate price comparisons.
If that means that fewer consumers have their hopes raised of a £9 flight to Europe, only to have them cruelly dashed by the small print of pricing policy, so much the better.