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Drip pricing

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From Wikipedia, the free encyclopedia

Marketing pricing tactic

In online retail, drip pricing (also known as partitioned pricing or shrouded pricing ) is a sales technique where a headline price is advertised at the beginning of the purchase process, followed by the incremental disclosure of additional fees, taxes or charges. The objective of drip pricing is to gain a consumer's interest in a misleadingly low headline price without the true final price being disclosed until the consumer has invested time and effort in the purchase process and made a decision to purchase.

Drip pricing is controversial because it can deceive consumers and distort competition by making it difficult for businesses with more transparent pricing practices to compete on a level playing field.[1][2][3][4] Many jurisdictions have enacted legislation to outlaw drip pricing of fees, taxes and surcharges. For example, throughout the European Economic Area and most of the rest of Europe, retailers must include value added tax in prices given to consumers. Article 22 of Directive 2011/83/EU on Consumer Rights outlaws the default selection of additional drip-priced charges such as pre-ticked boxes on websites; in the United Kingdom, this is enacted under Regulation 40 of the Consumer Contracts Regulations 2013.[5]

Industries where partitioned pricing has historically been prevalent include air transportation, lodging, auto dealerships, auction houses, online retailing, and sports and entertainment ticketing.[6] Studies show that consumers spend more when price tags are tax-exclusive than tax-inclusive.[7][8]

Effectiveness<br>[edit]

Studies consistently show that consumers spend more when price tags are tax-exclusive.[7][8]

Tversky and Kahneman’s research suggests that the reason for drip pricing being so effective is due to consumers anchoring on to what matters to them, for example the base price, and consider that the main factor when purchasing a product or service. They then take less recognition of the smaller prices, such as surcharges and therefore underestimate the total price as they are still considering the base price as a good deal.[9]

Xia and Monroes' research suggests that a small surcharge, for example 6% of the total price, would have a positive effect on the consumer's purchasing intentions as well as satisfaction as opposed to a high surcharge, for example 12%. However, this research also pointed out that even with the high surcharge of 12%, the consumer's purchasing intentions did not change, even if their satisfaction levels did.[9] This suggests evidence that drip pricing could be an effective pricing strategy, as it lures consumers in with a low base price and adds smaller charges, which the consumer does not recognize, as they are focused on the base price.[10] Even if drip pricing does not have positive impact on the satisfaction levels of consumers, it is clear that a company could extract higher charges from a consumer with similar, if not same, levels of purchase intentions.

By industry sector<br>[edit]

Airlines<br>[edit]

Drip pricing of unavoidable additional charges on air fares is outlawed in the European Economic Area, Australia, and the United States.

The United States Department of Transportation regulation known as the Full Fare Advertising Rule[11] requiring advertisements to include all applicable taxes, fees, and return tickets took effect on January 26, 2012.[12] That July, the agency fined Tripadvisor $80,000 for non-compliance.[13] In October, 2022, USDOT proposed adding regulations for transparency on ancillary fees like baggage, and requested public comment.[14]

European regulations[15] requires that "The final price to be paid shall at all times be indicated and shall include the applicable air fare or air rate as well as all applicable taxes, and charges, surcharges and fees which are unavoidable and foreseeable at the time of publication". In the early 2010s, many budget airlines sought to circumvent this requirement by adding surcharges for the most common means of payment. For example, Ryanair surcharged £6 per passenger per flight segment to process a single debit card payment whose cost was only a few pence. Article 19 of EU Consumer Rights Directive has limited such payment surcharges to "the cost borne by the trader" since 13 June 2014, but because of the prevalence of these surcharges, the United Kingdom enacted the legislation earlier than required with effect from 6 April 2013.[16][17][18] Later legislation[19] prohibits card surcharges throughout the EEA with effect from 13 January 2018, which the United Kingdom also enacted.[20]

In mid-2014, the Australian Competition & Consumer Commission took legal action against Virgin Australia and Jetstar in respect of drip pricing.[21][22]

After being...