When did nickel-and-diming customers become a best business practice? While banks and airlines have a long tradition of squeezing customers for every penny, they also do not top most-admired industry rankings.
Yet it is now becoming increasingly common for businesses of all stripes to ring the register at the expense of their customers. Investors should ask whether these fees are justifiable expenses for companies to recoup or whether companies are risking their reputations for what amounts to pocket change.
And in going after these penny ante costs, are the companies giving their rivals an advantage?
Erecting a cone of silence
Hotel operator Marriott International (NASDAQ:MAR) became the latest to raise controversy when it petitioned the FCC last week for authorization to block hotel guests' personal Wi-Fi and Mi-Fi devices around its properties. The hotel chain was previously fined $600,000 for deploying technology that blocked Wi-Fi devices at its Gaylord Opryland hotel, where the company was trying to force guests to pay for its own $20-a-day enhanced Wi-Fi service.
But Marriott said the blocking technology would not be used in guest rooms and only applied to conference and meeting areas as a means of preventing hackers from accessing the network.
Yet with Hilton Worldwide, Hyatt Hotels, and InterContinental Hotels shunning this strategy -- Hyatt is actually launching free Wi-Fi access in all its public areas and guest rooms worldwide -- Marriott might soon find its guests checking in with the competition down the street.
Flying at a low altitude
Companies in others industries, meanwhile, see the potential for taking market share away from rivals that nickel-and-dime their customers.
In 2010, Spirit Airlines (NYSE:SAVE) became one of the first companies to charge passengers for carry-on bags -- according to USA Today, Spirit has 24 separate baggage fees depending on when and where customers pay the fee. Southwest Airlines (NYSE:LUV), by comparison, largely has no charges, even for checked luggage.
Is it a coincidence, then, that Spirit is the only poorly rated two-star airline in the country, or that Southwest was second only to Delta Air Lines in domestic market share with a 16.6% stake as of September 2014 (compared to Spirit's lagging 2.1%)?
A more common practice than you think
Even if you don't realize it, so-called partition pricing is widespread.
A look at your cell phone bill reveals the monthly service plan isn't the only charge -- there are a multitude of other itemized services, including a premium for a data plan just to make your smartphone functional. Verizon (NYSE:VZ) once tried to charge customers a $2 "convenience fee" for paying their bill online, but the backlash caused the company to give up this practice..
Two years ago, Disney (NYSE:DIS) angered many of its resort guests when it experimented with installing RFID chips in its refillable beverage containers, so that it could limit the number of free refills they enjoyed.
Other fees we pay and might not think about include:
- GPS units or car seats at rental car companies
- Tech support with consumer tech companies
- Additional movie or sports channels with cable TV providers
- Delivery charges from retailers, whether the item was bought in-store or online
These fees don't seem to raise customer ire the way others do, and the key to acceptance might be whether the fees are being forced upon us without alternatives or if we're opting in. After all, usage fees ensure we're not paying for services we're not using or don't want.
There's even sense in Verizon's convenience fee, as the company was essentially passing along what credit card companies were charging it to process customer payments. Those costs will show up somewhere else on customer bills, just not as prominently. Even those seemingly egregious ATM fees have a purpose as you're paying for the convenience of 24-hour banking.
Your money or your life
While separate fees might feel like nickel-and-diming, they're at least transparent. And many consumers comparison shop based solely on the base rate quoted -- they look at just the monthly service fee for phone carriers or the base room rate when shopping for a hotel.
This is why airlines chafe at the image that they're scrounging around in your couch cushions for spare change. They say bag handling, for instance, actually costs more than what they charge.
While paying for the privilege of airlines losing your luggage seems especially galling, a la carte pricing can be a valuable strategy to prevent many companies from being accused of charging inflated prices. But as businesses jockey for any advantage in highly competitive markets, they should take care not to fall on the wrong side of public opinion.