What is... | June 10, 2010

What is drip pricing?

Few people have heard of “drip pricing”. But according to United Kingdom’s competition regulator, the Office of Fair Trading (OFT), many have been caught out by it.


Drip pricing is where optional or compulsory extras are added to the bill during the buying process, making it harder for the consumer to see the true cost. According to an eZonomics poll, just 23% of respondents knew what drip pricing was. A survey for the UK’s The Times newspaper found shoppers who buy online paid up to 22% more in hidden charges. The OFT launched an investigation into the practice and into four other common pricing techniques in 2009 and is expected to report back in December 2010.

One drip at a time
A range of pricing practices is used to attract consumers.Some say the fact that these are highly prevalent indicates that they are beneficial to businesses. A study for the OFT by economists at University College London found that out of five techniques surveyed, drip pricing led to the greatest loss to the consumer. The others included “baiting” (with a few discounted products); high reference prices; time-limited offers; and complex “three-for-two” offers.

Soaking the consumer
The findings were based on an experiment in which students were presented with online deals from a fictional retailer, in which they were hit first with an extra charge for handling and then with a charge for shipping. However, research suggests this two-part drip is relatively modest: according to the OFT, one package holiday provider used four unavoidable drips, and two computer retailers offered seven optional ones. Behavioural economist Tim Harford wrote in his Financial Times Undercover Economist column that drip pricing was complex and “makes it hard to compare offers”.

Coffee is extra
A graphic in Bloomberg Businessweek compared two flights from London to Munich. One flight cost $400, included meals, drinks and luggage. Passengers had to pay an extra $40 on travel to airports. The journey took three hours and 11 minutes and cost $441 in total. The second flight charged $221 for the ticket but charged $38.46 for the meals, drinks and luggage. Transit cost $51.41 as the airports were further from the city. The flight took four hours 16 minutes and cost $311 in total – still cheaper than the first but not as low-cost as it first might have seemed.

Hard to plug
In its preliminary report, the OFT suggested that all compulsory charges should be included in the headline price. Where there was a range of options for a compulsory element, it said a price for the options available to at least half of consumers should be displayed in the headline price. Consumers should not be automatically opted-in to any elements but be given “neutral” boxes to select their preferred level of service.
Economist Harford points out that it may be hard to regulate price drippers as they can usually find a loophole in any regulations. He says: “Buyers should remember that if they walk away when the drips start to fall, they won’t get soaked.”

Shopping

Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics

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