A Primer on Price Splitting: Why You Should Beware
When sellers use a low published price to close a sale, then try to make a profit on subsequent transactions, we call this "price splitting." Prospective purchasers often make the buying decision based on a published price, but the seller then finds a multitude of opportunities to increase the cost of what the customer is purchasing.
For example, retail outlets often advertise one product at a very low price, in hopes that when customers visit, they will purchase other products, thereby covering the lost leader. Electronics stores advertise low prices but then push extended warranties, which are very profitable for the store but expensive for the customer. Construction companies will submit low bids and then charge high rates for change orders.
Consider a business trip we recently took to Colorado Springs. We went online to book flights. We conducted a search for the appropriate dates and times. When the results came back, we of course clicked on the least expensive option. It was a US Airways flight. Within the next few minutes, we began to witness a seemingly endless array of offerings, which served to increase the price of the flight.
When we clicked on the icon to select a seat, we discovered that sitting in the exit row or near the front of coach class carried an additional tariff. Checking luggage cost $25 per bag. The site also automatically presented us with deals on rental cars and hotel rooms. At the airport, the check-in kiosk offered us the opportunity to upgrade to first class, for $175 each. For an additional fee, we could board the plane ahead of our fellow passengers.
Once onboard, we saw this barrage continue. Snacks and alcoholic drinks had to be purchased -- the days of a free bag of peanuts having apparently disappeared. In-flight shopping was encouraged in the SkyMall magazine. Wi-Fi was available. When we connected, we discovered more items for sale, on the landing page. However,access to the Internet would cost $12.50. Finally, we were offered the opportunity to apply for a US Airways credit card.
We’re old enough to remember when most of these services were free and the others didn’t exist -- so, what happened? The answer is that airlines have gained a better understanding of how people purchase airline tickets. Like us, many passengers decide which flight to take, based on price. Price shopping used to require calling multiple airlines. Then the Internet changed all that.
Now, passengers can price shop with just a few clicks, and many sites show possible flights, from the least expensive to the most expensive. There is tremendous value to being able to publish a low fare. However, if airlines are going to lower the price of published fares, they’ve got to make up the revenue somewhere or face bankruptcy -- hence, all of these upsells.
There are many other examples of price splitting. Consider the credit card industry. Price-sensitive credit card customers will typically make their buying decision based on the amount of the membership fee and/or the interest rate, if they plan to revolve a balance.
However, there are other charges, such as over-limit fees, foreign exchange charges or late fees. Often, people don’t factor these fees into their decision-making about which cards to accept and use. Therefore, these fees can be outrageously high.
Fees for being just $1 over limit, or one day late with a payment, might be $39 or more. Yet many customers will occasionally be a day or two late with a payment or go just a little bit over limit. Credit card companies make a lot of money on these charges that people don’t figure into the buying decision.
Price splitting makes sense when there is a large segment of the market that makes the buying decision based on price, but that doesn’t factor back-end charges into the decision. So, now that you know . . . beware.