October 11, 2015

Extra Fees For Services

On Saturday, September 13, I was listening to a commentary by Geoff Colvin of Fortune magazine.  His topic was the increase in the number of items for which U.S. domestic commercial airlines are charging extra fees.  He particularly noted that U.S. Airways is now charging extra for water, except if it is needed for medication.

Having run businesses that had many different kinds of fees, particularly financial services businesses, and having been a consumer for many decades, I have some observations about what makes fees acceptable, and what causes them to be annoyances to consumers.

The consumer has to believe that the purpose of the fee is valid.

There are three types of fees that are arguably valid: those that are charged for extra services, those that reflect added transaction costs, and those specifically designed to discourage certain conduct.  Some fees fit into more than one category, such as fees for late payment of a bill.  Late charges are a form of extra credit to the late payer, so there is value given by the biller, but they also reflect the cost of the biller being deprived of cash for a longer period of time, and needing to reflect that in a fee.  Generally, if a fee is justified by one of these purposes, consumers are more likely to accept it.

If the cost of doing business requires a fee for something that used to be free, it is far more palatable to the consumer if the seller also adds something of value at the same time.

In 1991, when I ran our HR function, I had the unenviable task of increasing health care premiums so that the employees’ total payments would approach 20% of our total cost.  This was much higher than we had asked them to pay before.

However, we simultaneously offered them broader coverage in the form of preventive screenings.  While they did not like the cost increases, they accepted them because we gave them something of value that they had not been given before.

The marketer cannot get greedy.

Even if the fee is for a valid purpose, consumers resent it if they think they are being gouged.  The amount of the fee has to bear some relationship to value or cost.  For example, if a late fee is more than a certain percentage of the outstanding balance, even if it is legally valid, it starts to look like loan sharking if it is too high.  Consumers also expect that fees will be reduced or eliminated when the reasons for imposing them disappear.  They do not like to feel that the marketer is using an external event as an excuse to raise prices and keep them raised.

Consumers do not like to be surprised by fees.

Fees need to be openly disclosed, not buried in the fine print of a lengthy contract, and the marketer is always better off explaining why the fee has been imposed.  For example, no one likes to pay a fee for checked luggage on airline flights, but when airlines explain that the extra weight of each piece of luggage adds significantly to fuel costs, the fee becomes more understandable when gasoline becomes so much more expensive.

Over time, consumers prefer high fixed rate charges to a charge that varies by the level of fees charged.

ATT and other telecoms have discovered over the years that consumers prefer predictable bills to lower, but significantly variable, bills.  They want the comfort of knowing the maximum amount they will pay, even if it is higher than what a variable fee-based bill would cost them.

Much of what I have said is common sense, but it is surprising how many marketers fail to adhere to it.