Every manager who’s ever set a price has had to wrestle with whether to “partition” the elements — charge separately for such things as shipping, installation or warranties — or to bundle everything into one price. Here’s how to decide.
If you’ve spent time at an airport recently, you’re likely to have overheard a conversation between a surprised non-frequent flyer and a ticket agent about fees for checked luggage. That exchange may have been a loud one if the airline was charging $25 (or more) per bag. Although charging separately for luggage allows airlines to advertise lower ticket prices, potentially increasing sales, incorporating baggage fees into the ticket price might increase the satisfaction of customers as well as raise the retention rate of check-in counter agents. And therein lies the rub.
When should a company “nickel-and-dime” customers by charging separately for various extras, and when is it better to keep things simple by combining all of the charges into one total price?
Consider another example: The price of wall-to-wall carpeting may or may not include the cost of installation or delivery to the customer’s home. Given that most customers neither own a vehicle large enough to transport a living-room–sized piece of carpeting nor have any desire to rent one, delivery is, for all intents and purposes, a required component of the purchase. If nearly all customers will be buying both carpeting and delivery, should the price of the carpeting include delivery or should the company charge for it separately?
Recent research suggests that price partitioning, the manner in which a total price is divided into components, affects customers’ price perceptions, their willingness to purchase and even their likelihood of repurchasing from the same vendor.
Whether partitioning or combining is more effective depends on a variety of factors, such as whether customers comparison shop, whether they are more sensitive to the prices of some components (delivery) than to others (carpeting), whether the price of one component is small or large relative to the others, whether the company controls the costs and quality of a particular component, and which components are most central to the customer’s goals.
3 Comments On: When Should You Nickel-and-Dime Your Customers?
I think sellers willing to quote some other costs separately, such as delivery costs, should be ready to entertain requests from buyers to do the delivery themselves. If buyer can transport, for example, the carpet bought at a great savings from, say, the $100 charge, the seller must then be ready to part with the goods at the shop premises.
Very interesting. We sell a software-as-a-service product for a flat price. Our competitors use partition pricing. Our strategy has worked quite well.
- Babar
Excellent article that articulates the tradeoffs between bundled and itemized pricing! A few comments:
I think consumers assume that pricing of components is related to the costs of those components, which suggests that the price sensitivity differences highlighted in the article are completely rational. A higher-cost warranty implies a product is unreliable. A $74.95 product must be superior to a $49.95 product that costs $25 to ship and handle.
Also, I would like to see further research on how separating S&H costs causes customers to put off purchases so that they can combine multiple items. Do customers buy more items overall when they can buy them one at a time without feeling like they’re wasting money on shipping.
Another topic only lightly covered in the article is the perceived “fairness” of partitioned prices. DigiKey.com charges shipping fees that are unknown at the time of the order, but are charged later based on the true price paid to the shipping courier. This “fair” price appeals to customers. At the other extreme, Vonage charges an “Intellectual Property protection fee” which is perceived as unfair because it is not a direct tax or fee paid by Vonage.
Finally, readers of this magazine understand that there is general economic value to offering greater pricing flexibility. Raising shovel prices after a snowstorm ensures that those who need shovels most get them, rather than customers who were lucky enough to get to the store first. Separate baggage fees prevent travelers from carrying more stuff than they really need. I believe good business strategy involves identifying this economic benefit and figuring out what customer messaging, through marketing and pricing strategies, achieves the win-win situation of operating at the economic optimum.