Most video rental stores offer a midweek two-for-one special — an apparently good deal to entice people in on a slow day. The catch is that the offer does not extend to late fees: When customers are late in returning the videos, they have to pay a fee on each one. That second video isn’t really free after all. And those late fees add up, constituting up to 20% of Block-buster Inc.’s revenue, for example.
Similarly, cell-phone operators, rental car companies and many others announce one “low” price for their offerings while hiding various charges in the fine print. And in a way reminiscent of a price war, once some companies are pricing this way, others feel they have no choice but to follow suit.
The conventional wisdom is that such tactics are a good idea; after all, they allow companies to boost profits while seeming to price competitively. But hidden pricing can be harmful not only for consumers who can’t figure out what something really costs but also for the businesses that engage in it. And as examples from the appliance industry and restaurant business demonstrate, companies that engage in honest pricing can enjoy important benefits — happier customers, clearer product differentiation and, consequently, higher profits. In short, telling people what things really cost can make more business sense than racing downward against competitors to... To read the complete article, login or sign-up using the form below.
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