Additional Fees: Customer Irritating but Profit Generating
Additional Fees, aka: Junk Fees, Hidden Fees, and Sneaky Fees. What should a marketer or pricing professional think of them?
Additional Fees are Common
Additional fees are a common part of many businesses. True, many businesses avoid them at all costs but as a consumer I find them nearly unavoidable.
The financial service industry has created an entire library of fees. Consider:
- Banks charge fees related to overdrafts, non-network ATM, minimum account balance, transactions, late payments, wire transfers, and more.
- Mortgages can have fees for applications, inspections, underwriting, mortgage rate locks, processing, couriers, credit reports, administrative, wire transfers, document preparation, commitments, emails, origination, and a broker.
- Timeshares routinely have membership fees and maintenance fees but using a timeshare can have fees related to choosing a different location, changing a reservation date, changing room size, resort fees, point retention fees, and point transfer fees among others.
But additional fees aren’t just a financial service industry attribute. Consider Spirit Airlines fees for Passenger Usage, Reserving Seats, Boarding Pass and Online Check-in, Carryon Baggage, Checked Baggage, Overweight/Oversized Baggage, Onboard Snacks and Drinks, and In-Flight Entertainment
You might be tempted to believe that additional fees are only the scourge of the worst industries or the worst companies, but they arise across many industries and brands, both luxury and low-cost.
- Peloton added a $250–$350 fee for delivery and setup in 2022
- Lettuce Entertain You added a 3% “Processing Fee” on tabs at their restaurants
- Harley-Davidson inc. added a mandatory “materials surcharge” on motorcycles of $850 to $1,500
- Marriott International Inc.’s Autograph Collection hotels add a “sustainability fee” of $5/night, later repealed at many establishments
- Container shipping companies are routinely charging shippers “container handling fees”, sometimes in excess of $6,000, on shipments that already cost $17,000–$25,000, ten times the shipping rate a few years ago
- Frontier Group Holdings Inc. adds $1.59 per-flight-segment Covid fee
- Auto dealers selling thousands of dollars above MSRP with “market adjustment fees” while others began requiring extras such as protective paint coatings
And then there are standard business-to-business fees such as Small Order Fee, Logistics Fee, and Order Processing Fees.
The list of potential additional fees charged by various businesses is limited only by our collective imagination.
The Not So Good
Some of these fees are pure profit generators. They far exceed the cost to deliver whatever their associated benefit is, if they deliver any benefit at all.
The Consumer Finance Protection Board (CFPB) of the United States estimates that “junk fees” cost Americans tens of billions per year. Though the CFPB falls short of defining what exactly a junk fee is, they state a characteristic feature is junk fees “often hide the actual cost of a product or service since they aren’t disclosed upfront.”
If the CFPB’s first claim is true, additional fees are a large profit-generating source for businesses that consumers should hate.
The Not So Bad
Additional fees can serve morally-legitimate and consumer-positive business purposes.
First, additional fees are often aligned with business operational requirements. Some fees are incurred to discourage customers from taking actions which harm business profitability and others are assessed in relation to increased operational costs to meet specific customer demand. Many fees in business markets and elsewhere fall under this category.
Second, additional fees can be used as a market segmentation hedge. A low price for the basic offering encourages many people to perceive the basic service as a good bargain. As customers demand further services and products, further fees are added. Spirit Airlines and more recently Disneyworld, have used basic pricing and add-on fee structures in this manner.
The Ugly Marketing Challenge
Additional fees do present clear marketing downsides. Customers don’t like surprise costs. Egregious use of additional fees can inspire complaints that portend brand betray. At their worse, they lead to lawsuits and government inquiries.
Yet they also have clear marketing upsides: They can enable the company to serve a larger number of customers with a more basic offering while charging those that demand a better offering a higher price. They can encourage customer behavior towards lower-cost and more profitable patterns. And, yes, they can generate substantial profits.
We settle upon neither a cheerleader nor a prosecutorial position on additional fees. As with most issues in pricing, additional fees demonstrate the realpolitik of pricing – it defines the terms of customer transactions. Additional fees can serve a positive business function but can also create unnecessary problems. For executives, it is best to consider additional fees from a clear-eyed perspective rather than gut reactions of recoiling in fear or aggressively fulfilling one’s greed.
But just as we refer to “price discrimination” as “price segmentation” to avoid a mob insurrection, businesses should avoid broadcasting “junk fees”, “hidden fees”, and “sneaky fees” in favor of quietly but clearly stating their “additional fees”. Or even better, reframe as “add-on offerings”.