Ambushed by added fees
On vacation in Paris this summer, Matt Hanna was prepared for a few surprises. He did not expect, however, that they would unfold in the office of an American rental-car company.
After returning his one-week rental to a Hertz dealer in Paris, Mr. Hanna was alarmed to see his final bill inflated by $50 above what he says was the quoted price.
The reason for the increase: A $40 "additional driver" charge and an extra insurance fee, neither of which were mentioned when Hanna handed over his credit-card information and signed the original rental agreement. Hertz's policy is to inform customers of all possible added charges before they sign a contract, according to company spokesperson Paula Stifter.
The company's alleged failure, in this case, to give notice of the extra charges bewildered Hanna. "That sort of thing bothers me," says the Boston attorney. "Hotels do the same thing."
The addition of less-than-obvious fees is growing more common across among a range of services. An increasing number of companies from airlines and rental-car companies to local and long-distance telephone carriers are loading consumers' bills with additional fees, experts say.
In many instances, consumers do not become aware of the charges until they see the final bill.
The costs often result from an uptick in local or state taxes, passed on to consumers. But other fees are added by service firms to compensate for base prices set to beat the competition.
Add-on fees have been used sparingly for a half century. But marketers have become much more savvy about consumer psychology during the past decade, experts say, and the recent economic slowdown has driven some to try more unconventional tactics.
"The economy has dealt companies a double whammy," says Meryl Gardner, a marketing professor at the University of Delaware in Newark. "Companies have less money to pay for costs, but fewer customers can pay higher prices. By passing costs on to consumers as an added fee, they may be able to keep their budgets flat."
Consumers have recently seen new fees pop up for a variety of services they once received for free.
Last week, Northwest Airlines started charging leisure travelers $25 for paper tickets. Delta recently began enforcing a $40 charge for each checked bag beyond the second piece, and Continental issued a vague statement promising "new and additional fees for services that low-fare customers select."
Consumers could soon be regularly charged extra fees for meals and for receiving frequent-flyer miles for a flight, according to Henry Harteveldt, a travel-industry analyst with Forrester Research in Cambridge, Mass. Now, they already pay about a $15 "airport tax," a $10 "security tax," and a $10 "fuel surcharge."
The new charges closely parallel the pricing structure of the hotel industry, where local calls and e-mail access draw small fees, and charges for an "arts fund," "municipal building fund," and an "occupancy tax" can add 30 percent to consumers' final bills.
Both industries are aware that most of their customers prioritize price when booking their services. But studies indicate that once customers have chosen a company's service, they are less likely to switch to a competitor, even when faced with eye-popping fees.
"You get the consumer to take a stand, to make a commitment to purchase the product," says Dan Howard, a marketing professor at Southern Methodist University in Dallas. "Despite the fact that consumers are upset by unexpected fees, there is still a tendency for them to go through with their purchases."
Behind the rise in fees: Intensifying competition among rival services.
Consider the rental-car industry. When rental companies were charged various fees by airports during the mid-1990s, they absorbed the costs themselves or passed them on to customers by hiking their posted daily rates.
Shrinking profit margins in recent years, however, have spawned a new approach. A $5 fee levied five years ago by airports for the use of their facilities caused a few rental agencies to tack the fee to the bottom of customers' bills.
The other major renters, desperate to keep their prices competitive, followed suit. Now, a laundry list of fees appears on car-rental bills, including an "airport facility use fee" of about $4 per day, an "airport concession fee" of about 15 percent of the base fee, and $1 per day "vehicle licensing fee."
"It's always kind of a shock now when you get your bill," says Mike Taylor, director of travel services for market-research firm J.D. Power and Associates in Westlake Village, Calif.
Parity among competing services is at the root of the pricing trend, experts say. As the nation's service economy matured over the past decade, and more competitors pursued the same customers, companies' services soon became indistinguishable.
"These industries are commodified," says Professor Howard. "When one brand is like the other, you've got to snare them with your pricetag."
That pressure is particularly acute among telephone companies. The singularity of the service connecting one phone user to another has prompted firms to differentiate themselves through pricing schemes.
With customers scrutinizing posted base rates, they often pass on business costs as an unadvertised, added fee, labeling them a "surcharge" or "tax." Among them: $5 charges for "local access" and "universal service."
"The companies have decided on a widespread basis to pass these business costs on to consumers," says Linda Sherry, spokesperson for Consumer Action, a national consumer-advocacy group in San Francisco.
The fees continue to mount. On Sunday Sept. 1, for example, MCI began charging customers in 11 states an "instate access-recovery fee," ranging in cost from 50 cents to $1.95, to pay for the cost companies charge MCI to carry calls over their networks.
Passing costs to consumers through added fees rather than price hikes boosts upfront sales. But studies show that, in the long run, the practice stokes customers' frustration.
"Sometimes an added-on fee can be the straw that breaks the camel's back," says Professor Gardner.
Consumers tend to be most irritated, say experts, when they perceive that companies are employing intentionally vague sales tactics.
While renting a car from an Avis dealership in Boston, Matt Hanna was told that insurance would cost him $30. Shortly after leaving with the car, Mr. Hanna returned, curious whether the $30 was a one-time fee or a daily charge. Hanna was bemused to learn that it was the latter. "Nobody said 'per day' when they showed us the contract," he says.
The extent to which companies must disclose the fees that might apply to their service hinges on the breadth of the consumer-protection law of the state in which the transaction is made.
In Massachusetts, for example, companies are required to disclose to the customer all information that might significantly affect their decision to enter into a transaction. That information includes an approximation of the final price of the service, and any fees the consumer may incur, according to Stuart Rossman, director of litigation for the National Consumer Law Center, a Boston-based advocacy group.
Other states' requirements are far less stringent.
Consumers can find some relief from price ambiguity. Many Internet sites that aggregate the costs of different competitors, such as Travelocity.com, take added fees into account when listing the price of a service. Such sites have made it more difficult for companies to disguise extra costs, experts say.
"It has forced them to become more conscious of giving people more itemized detail of what the total is going to be," says Steve Telleen, a website quality analyst with Giga Information Group in Santa Clara, Calif.
Other customers surprised by unexpected fees simply choose to discontinue service. "Some retailers think that customers will forget about it. But it actually causes repeat sales to decrease," says Howard.