To Fee or Not to Fee: Strategies to Avert a Fee Rebellion

 

Takeaway

  • Consumers aren't ignoring the fine print; recent protests have caused companies to roll back proposed fee increases.
  • Social media and other communications channels allow individuals to make a big impact on companies.
  • Whether the fee increase is perceived as fair makes a difference in consumers' willingness to accept it.

For American consumers, one of the side-effects of the Great Recession has been an explosion of fees — those annoying extra charges that get tacked onto phone bills, bank statements and plane tickets. For cash-strapped corporations, they offer a way to boost revenue without appearing to raise prices. When a fee is only a few dollars and buried in fine print, how many customers will notice or complain?

The answer, as Bank of America found out, can be 300,000. That’s how many signed an online petition last October, protesting a new $5 fee for using a debit card. After a month, the company dropped the fee. Other banks that had considered debit fees, like Wells Fargo and Citigroup, abruptly changed their plans.

In December, Verizon Wireless ran into a similar firestorm. After it announced it would charge $2 to pay bills online or over the phone, another online petition quickly drew 165,000 signatures. It took less than a day for Verizon to backtrack.

Are corporations facing a full-fledged fee rebellion? According to two University of Texas at Austin faculty members, the answer is yes — and they need to change their marketing and pricing strategies to soothe the new mood among fed-up consumers.

Fueling the rebellion are social media, which level the battlefield between consumer critics and corporate giants. Both the Verizon and Bank of America petitions were launched by a single activist — a 22-year-old Washington, D.C., nanny named Molly Klatchpole — but quickly went viral.

“The thing that’s changed is the absolute warp speed of communications,” says Terry Hemeyer, senior lecturer on public relations at the College of Communications. “Right now, you have instant carpet bombing that goes everywhere, through multiple communications channels. It’s given power to a few people, if they want to have a big impact on a product or a company.”

But the underlying spark is consumers’ sense of fairness, says Raghunath Rao, assistant professor of marketing at the McCombs School of Business. “Imagine the consumer reaction to the fee charged by Bank of America: ‘We are the ones who rescued the company. Now they’re in good health, and they’re coming back at us.’”

Fairness, says Rao, is a hidden factor in the public’s willingness to accept higher prices. He points to a 2008 study in which a women’s apparel firm mailed two sets of catalogs. Both charged the same prices for large-sized clothes, but one set charged $2 to $4 less for smaller sizes. Shoppers, it turned out, ordered fewer large clothes when they felt they were penalized by the price gap.

Consumers look at relative increases as well as absolute ones, Rao adds. Last summer, when Netflix charged $16 for video services that had previously cost $10, the hike was a mere $6, yet still too much to go unnoticed by customers. “It’s not a huge increase, but people have a notion of relative prices, not absolute prices,” he says. “For them, the increase is 60 percent, not just $6.”

With consumers more prickly than ever about pricing, what are the new rules for companies that want to add or boost fees? Hemeyer and Rao suggest these:

Look Before You Levy

“Not enough consumer research goes into the decision to add a fee,” says Hemeyer. A smart company will test a fee in a few markets before rolling it out nationwide. If that’s not practical, it can propose a new fee as a trial balloon, and gauge popular response before deciding to impose it.

“Most good companies,” he says, “have an ongoing system for getting customer feedback. You don’t just gin up a study in a day or a week. It costs more money to keep an ongoing read on your customers, but it’s worth it, because you can lose so much money if you don’t.”

Reconsider

Before raising a fee, suggests Hemeyer, a firm should ask itself, “Why do we need the fee increase, and is it a good reason we can explain to the public? Is it worth charging the fee for the grief we’re going to get, or do we need to look inside and make cuts instead?”

Explain Yourself

If a price hike is really necessary, explain it clearly to your customers, says Rao. Netflix had valid reasons for raising prices, because moviemakers and TV networks were charging it higher royalties for video content. But it didn’t make that case to subscribers, and 800,000 of them left. “The biggest mistake Netflix made,” Rao says, “was its inability to communicate the reasons behind its price increase.”

Full Speed in Reverse

“If something doesn’t work, stop it fast,” says Hemeyer. In January, he notes, the new owner of the Houston Astros suggested changing the team’s name. Fan response was so quick and negative that he backpedaled after a week, announcing that the Astros would remain the Astros.

Ignore these rules at your peril, says Hemeyer, because more such rebellions are coming. “As a general statement today, it’s harder to initiate or hide fees to consumers, because the digital people, the bloggers, the tweet people love to take this stuff on. I think this is the beginning of a trend.”

 

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Faculty in this Article

Raghunath Rao

Assistant Professor of Marketing McCombs School of Business

Raghunath Rao is an assistant professor of marketing at the McCombs School. He earned his Ph.D. from the University of Minnesota, and his research...

Terry Hemeyer

Senior Lecturer, Department of Advertising College of Communications, University of Texas at Austin

Professor Terry Hemeyer is one of the few public relations executives that have attained C-suite status beyond typical communications functions....

About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

Comments

#1 UT should take this into

UT should take this into account when they raise tuition by 3% every semester! That's an increase of over $200 each semester. -.-

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