[Pricing Nugget #019] Drip Pricing: The Dark Side of the Pricing Force

Today we talk about surprises – but not the good ones.

You probably have had the same experience in the past.

You look for an airline ticket, a hotel room, or a new electronic gimmick, and you find a very attractive price on the website.

Thrilled about this bargain, you click through your customer journey from page to page only to find that fees and surcharges are added that you expected to be included: For example,

• for being allowed to bring your luggage with you on your flight,
• Wifi in your hotel room, or
• shipping the items you just bought to your place.

This practice of showing only parts of the final price upfront (e.g., a base price) at the beginning and adding fees and surcharges in a piecemeal way is called "drip pricing."

What do you think?

Do you like it? And does the company like it?

We will find out today.

Experiment: Drip Pricing in the airline ticket market

Researchers asked participants in an experiment to buy an airline ticket. They presented two options: a lower base price and 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 made their choice and added add-on options in the subsequent steps.

The researchers randomly assigned participants to a drip or nondrip condition.

In the drip condition, prices for add-ons were only revealed after the initial base price choice was made. In the nondrip condition, fees for add-ons were presented next to the base prices when participants made their initial choice.

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

How did customers decide?

The study showed that customers were more likely to choose the lower base price with additional charges when the price was dripped.

Only 11% of participants favored the low base price option when the price was not dripped. But this share more than tripled to 37% when the price was dripped.

Was this a wise decision – at least for the customer?

Then the researchers checked whether the participants were better off if they had chosen the other option at the beginning, given the add-ons they added.

The study showed that the share of customers who made a financial mistake more than tripled to 23.4% when the price was dripped.

How satisfied are customers with this decision?

Customers were relatively dissatisfied with the decision when the price was dripped.

Why do customers not start over and choose the other option?

Three reasons explain why customers do not start over:

• First, customers overestimate the effort it takes. They assume it is too much work to go through the whole process again.
• Second, customers underestimate the benefits of starting over. Customers assume that all providers would apply similar charges. This belief is misguided – and in the experiment, it was made very salient that the other option would not come with additional charges.
• Third, starting over means, you admit you made a wrong decision. And this mistake makes customers feel pain and experience psychological costs.

The bottom line

• Drip pricing makes customers choose a low base price option with additional surcharges shown afterward.
• This choice is more likely to be a financial mistake, and customers pay too much.
• The decision makes customers less satisfied.
• But customers do not start over: too much effort, too little gain, too much pain.

My advice to companies on Drip Pricing

Do not give in to the dark side of the pricing force.

• Companies that apply drip pricing might benefit in the short-term.
• But customers are less satisfied with the decisions they make.
• They feel more deceived. And they are more likely to attribute these negative emotions and attitudes towards the pricing practices to the seller and the company.
• In the long-run drip, pricing might negatively affect the fairness perception customers have, and the brand image customers hold. It might become negative.