How To Nickel-and-Dime Your Customers: An Experiment

Many companies that compete on price advertise low base prices in order to draw in customers, but then they hit those customers with add-ons and additional fees once the purchasing process has started.  Customers get “nickeled-and-dimed.”  This strategy is called price-partitioning, and it can alienate customers, decrease repeat sales, and damage a company’s brand.  When is it in a company’s best interest to take such an approach to pricing, and is there a way to do it that protects the company’s reputation?

We hypothesize that customers who are given an explanation of add-on fees will have higher satisfaction with the purchasing experience and will be more likely to recommend the company to others compared to those who receive no such explanation.  The particular explanation would address the three consumer must-haves.  It would include:

1. a company’s reasons for charging the fee,
2. justification of the amount of the fee, and
3. what additional benefit the customer receives from paying the extra fee.

We also hypothesize that customers who are charged one all-inclusive fee have higher satisfaction than those who are nickeled-and-dimed.  We measure how much of the lost satisfaction is regained when pricing explanations are given.

To test the posed hypothesis, we conducted a randomized experiment where subjects had an online buying experience with varying presentations of the seller’s price partitioning scheme.  Sometimes subjects were charged one all-inclusive price.  Other times subjects were given a base price and then had additional fees added on during the purchasing process.  For those subjects who faced add-ons, sometimes they received explanations of the fees and sometimes they did not.  At the end of the process, all subjects were given a survey asking them to rate their satisfaction with the experience and how they felt about the company.

We draw two main conclusions from our study:

1. Consumers who are nickeled-and-dimed are more dissatisfied and less loyal than those who are charged all-inclusive fees up front.  
2. Within the group of consumers who are nickeled-and-dimed, there is no difference in customer satisfaction or loyalty between those who are given explanations of the add-on fees and those who are not.

We did have statistically significant evidence that Treatment Group 1’s results (those who were not given explanations) always showed lower satisfaction than Treatment Group 2’s results (those who were given explanations) when compared to the control group.  We believe this is enough evidence to warrant further study of whether pricing explanations help to buy back some customer goodwill.