Last week I ordered tickets to a spring training baseball game, and it was another demonstration of the power of multi-part pricing. By that I mean the amount the customer ultimately pays includes multiple components, and they add up to more than the headline amount. When we experience multi-part pricing, i.e., pay the extras, we often grumble about it. However, we generally pay the extra fees and come back again, proving that multi-part pricing strategies can be very effective.
The baseball tickets were sold through Ticketmaster, who has an exclusive arrangement with Major League Baseball and many other entertainment providers. I selected the best seats available for the game, and they were priced $32.00 each. In addition to the face value of the tickets, I paid an Order Processing Fee and a Service Fee. In total those fees added 19% to the price of my tickets. Earlier in the month, I bought tickets to an upcoming concert, also through Ticketmaster. The extra fees were an additional 14% above the price of the tickets. Those extra fees obviously did not stop me from using Ticketmaster again. If you want to learn more about the Ticketmaster process, listen to the Freakonomics podcast Why is the Live-Event Ticket Market So Screwed Up.
Sporting events and concerts are not the only users of multi-part pricing. My most recent hotel bill included separate fees for State Tax, County Tax, City Tax, and State Cost Recovery Fee. My most recent auto rental included six separate taxes and fees adding up to 55% of the base rental fee. Although some of these add-on items are taxes imposed by the politicians, many of the fees are not. They are just clever ways of increasing the total amount the customer pays while trying to avoid sticker shock.
There are two basic forms of multi-part pricing. One is designed to present things to customers in a way less likely to trigger a price-sensitive reaction. The second is designed to let customers segment themselves and choose the things they value most. Add-on fees and fees for parking are examples of the first type.
For the second type, consider Disney World. They have had fast pass options available for years. They sell a ticket to the park for a base price, and that gives you entrance and access to all the rides. Unfortunately, at popular times, the waiting lines are long. For a fee, you can buy a fast pass and get in front of a limited number of lines. No waiting! The fast pass lets customers who value their time the most pay extra and keep some of their time. It helps Disney raise revenue and enables customers pay a bit less if they don’t mind waiting.
Another example we are all familiar with is airlines. Although passengers initially got angry about paying to check baggage or to buy meals, they got used to it. Now customers who value those things can pay for them, and they can also pay for more seat space and leg room, and earlier boarding. Other customers who might want those things, but do not value them as much, can avoid paying for them and stick with the base offering. In other words, they can segment themselves. You may be tempted to argue that Southwest does not do that, because Bags Fly Free. However, Southwest does charge extra for Early-Bird check-in, Business Select (which gets you to the front of the line), and refundable tickets. Those are all multi-part price examples.
Less obvious examples of multi-part pricing are options on new cars, computers, etc. The manufacturers try to keep the main sticker prices of the base models relatively low. They do so by offering base models with fewer features and capacity; but they also enable customers who want more features to buy them. Some things are relatively advanced like collision warning systems or high-end graphics cards. Other things are simple like floor mats and laptop cases. Either way, customers are usually paying more than the base fee, and the sellers are usually making higher margins on the add-ons.
Now think about a less-obvious example like restaurants. We all pay more than the prices printed on the menu. Of course, sales tax is added, but so is the tip. Most diners add 15% – 20% of the total as a tip. Yes, the tip is allocated to all the workers, but every company that sells you something must pay their employees. By having the tip be a separate, add-on fee, we don’t focus on it when considering the prices of menu items. Although tipping started in the US many, many years ago, standard tip percentages have increased. Consumers tend to be less sensitive to the “price” of the tip than the price of the menu items.
One final example is extended warranties. Although most cars, appliances, electronics, etc. last well beyond their typical warranty period, retailers have found they can sell extended warranties. Consumers are buying something they want to last, and they don’t want to have to buy a replacement anytime soon. For a fraction of the cost of the new product they are buying, the consumer can buy an extended warranty. Retailers make very healthy margins on extended warranties, because statistically many of them expire having never been used. Customers don’t think about that. They think it is a modest price to protect their purchase, and they buy it.
There are many more examples. Any type of fee added to a base price is multi-part pricing. Breaking your prices into multiple parts can often be a very effective pricing strategy. The initial amount (the base price) is lower so the customer is less likely to be sensitive to it; it is a good way to sell components of a product or experience that most buyers will want; and it is a great way to improve your margins. Think about how it might work for you.
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