Do Low Prices Deceive You?
“Give away the razor. Sell the blade.”
–Every MBA professor for the past fifty years
That’s my Monkey Brain’s favorite saying. He knows that the soft spot in my heart is finding something on sale or something cheap. This is one of the few places where Monkey Brain and I have our interests aligned. We both like low prices.
However, Monkey Brain has trouble doing math. He isn’t familiar with the term Total Cost of Ownership, sometimes known by its acronym TCO. Monkey Brain often confuses cost and value. Actually, he doesn’t really care about value. He just cares about cost. Lower cost means he can go out and buy more things!
There are many instances where it benefits the seller to attempt to hide additional costs associated with a low up-front price. As M.I.T.’s Xavier Gabaix and Harvard’s David Laibson show, marketers have no incentive to educate customers about hidden fees because the uneducated customers will pay them, and educating the customers just shows them how to avoid the additional costs.
Let’s look at a couple of examples.
How many times have you checked in at an airport and been behind someone who expresses surprise, disgust, and then resignation at a checked bag fee? The person in front of you probably saw that the airline had the lowest fare, booked it, and went merrily to the airport, forgetting (or being ignorant of) the checked bag fee that is rampant throughout the airline industry. The airline has no incentive to remind this customer of the fee beforehand, lest he pack a carry-on and the airline lose the checked bag revenue.
The same holds true for hotels. Many hotels, particularly business hotels, still charge a wifi fee, even though guests could walk down the street and get free wifi for the cost of a cup of coffee at a café. Why do they do this? They charge the fee because they know that there is an inconvenience to packing up your laptop, heading down to the café, buying a cup of coffee, and then using the wifi. What if you need to surf the web at 3 AM? Good luck finding that open café. Hotels realize that there are people who will pay for the “convenience” of in-room wifi, and the inconvenience is not enough to get others to switch to a different hotel. Educated consumers will find alternatives, but it’s in the hotel’s interest to capture a reservation and then, once the guest is there, show the sign for the $19.99 wifi fee.
Monkey Brain sees the low initial costs and reaches out for them like a pile of bananas. Monkey Brain doesn’t like to do the additional work and searching to determine what something will truly cost. He sees the first price and becomes anchored to it.
Here’s how to fight the impulse to think that the first price is the best price:
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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