Overcoming the Loyalty Erosion Problems of Drip Pricing

Are you aware of the term ‘drip pricing’ for hotels? Market and advertise the base daily room rate then divulge additional, and exceedingly compulsory, fees after a customer has signed on the dotted line. These extras might include anything from resort fees, housekeeping charges, fitness room fees (whether you use it or not) to amenity surcharges for local phone calls, in-room internet access or bottled water. Even with most federal laws dictating that charges for these items must be wholly visible and conspicuously outlined, the consensus amongst guests is that such tactics are frustrating and deceptive; not exactly the adjectives you’d attribute as loyalty builders.

Look to two cross examples: airfare fuel surcharges and cruise line port fees, both of which have been officially deemed unreasonable to the consumer and rectified to a certain extent. In the short run, customers bore the brunt. However, regulators had the prescience to look beyond and understand that these actions inevitably hurt vendors by deteriorating brand trust. Drip pricing for hotels follows a similar pathology but with a salient caveat. These compulsory fees are complicated by the pricing models of third-party interlopers.

Lo and behold, we’re back to discussing the surreptitious actions of the OTAs. Such sites are engineered towards displaying the lowest prices possible, which also happen to be the most accessible method for potential consumers to favor their reservation engines over, say, booking directly through brand.com. Marketing ‘Cheap!’ is, after all, a proven technique, beckoning our impulsive natures to surface. And so the OTAs milk this by only exhibiting the basal daily room rate and keeping the remainder hidden; it’s their choice. Only after a nonrefundable purchase is complete, do the applicable fees start to drip, drip, drip to the surface.

We hoteliers know this is a serious issue; we are in the business of satisfying our guests, not incensing them. And yet we are hamstrung.

In this race to the cheapest marketable price-tag, properties have no choice but to oblige. You would lose business to competitors if you didn’t follow this paradigm, and desiccating your interactions with such third-party sites is currently implausible. You have to meet customers where they are buying, and OTAs are rapidly proliferating bazaars. Regretfully, they hold all the cards.

The numbers can offer a misleading counterargument. Ancillary levies now account for over $2 billion in revenue in the United States alone. Not bad, but not good either if you are thinking long-term. When a guest doesn’t understand the rationale behind an additional cost, do they complain to the OTA or the hotel? When a guest is told that such fees are mandatory and written into their initial purchasing agreement, do they blame the OTA or the hotel?

Give yourself a cookie if you guessed the latter in both cases. Consumers perceive hotels as the culprits, and as such, we are the ones who suffer from loyalty erosion, all the while the opacity of the OTAs remains. It’s a sad state of affairs and hotels are drawing the short straw. Turn your speakers on to the dolorous ‘Taps melody’ for a minute, and then think of how we can fix this.

An Example to Elucidate the Broader Issue
Let’s start with in-room internet access fees – an issue I’ve harked on extensively in the past. Your guests know there is a cost; they have cell phones and high-speed access at home. Their monthly bills never stop coming. Like electricity and running water, it’s a ‘mi casa es su casa’ mentality – an essential service where charging ‘extra’ is a surefire faux pas. The ideal solution is to charge everyone and bury the expenditure into the daily rate. But it’s not that simple.

Budget properties should be commended as they are increasingly offering in-room internet as complimentary. Obviously they are burying of the tangible cost as well as its associated markup, the size of which cannot be said for certain without a glance of the accounting ledgers. In addition to this, when you offer internet access ‘for free’, it may well be perceived as a bonus!

However, incorporating the cost into the daily rate upfront raises the issue of price sensitivity; your product now appears marginally more expensive than your rivals who save the extraneous levy for later. As a result, your listings garner less click-through considerations and, ultimately, purchases. Maddening still is that the consumer doesn’t encounter the warning labels for compulsory fees until they are halfway through the booking process. “Well, I’ve already made it this far,” is undeniably a popular inner monologue for such eye-rolling occasions.

This case is intriguing because there’s generally less latitude for price increases at the thrifty end of the spectrum and that internet access can be one of the heftier surcharges when considered alongside bills such as additional towels ($2-$4), safe warranties ($1-$3 per night), local telephone calls ($1 per call), a grounds keeping ($3-$8 per night), or an overall resort fee ($20-$30 per night). Taken together, all these little costs can add up, or subtract if you are judging them from a search results point of view.

What This Says About the Modern Consumer
I’ll leave the issue of acceptable price sensitivity to the revenue managers and other numbers gurus. As you might have already inferred from the abovementioned examples, nearly any aspect of a hotel experience can be ‘dripped’. Therefore, an area to explore in tandem with price sensitivity is modern consumer behavior – which fees are tolerable and which are deal breakers.

Hotel customers these days strive to know what’s included with their rooms. They have the wherewithal to research ahead of time and know when they are being cheated, at least from their perspective. Let’s turn to the previous example to clarify.

Internet access costs money. It’s not that guests can’t afford it; it’s that they believe the hotels are taking advantage of them by demanding an extraneous levy of $10 to $15 per day. Here’s the thought process going through a guest’s mind at some level or another: $15 per day is $450 per month, a markup of more than 400% over what even the premium cable packages table per month. In short: highway robbery.

How about the $4 bottles of water and $1 local phone calls? A simple mental calculation is all any guest needs to identify these as ludicrous margins. A common objection cited by hoteliers is that the property should be adequately compensated for giving guests the luxury of ready-at-hand water-in-disposable-plastic and access to a hard line in their rooms. Moreover, others feel as though they can charge for this because customers have the disposable income to cough up. Both of these opinions are maligned.

Believe you me, markups are a necessary part of any business’s survival and I’m not advocating any sort of Bolshevist reversal of a trade system that has worked since the dawn of civilization. However, the flip side of market capitalism is that those who charge too far above the perceived value will be logically rebuked with fewer sales. Economics 101.

A convenience store stays afloat by charging $1 per bottle of water because it gives its consumers the utility of not having to drive 30 minutes to a warehouse and buy water by the pallet. But this isn’t a 400% markup; more like in the range of 100% to 200%. Hotels should stick to common practice as a $4 bottle of water is sending the wrong message. It’s saying, “We are charging you this much because we can get away with it,” instead of, “We are charging this much because we must in order to make ends meet.”

Many managers talk a big game about how they strive to empathize with guests and deliver warm, compassionate experience. Right they should; hotels are an emotional purchase and playing the harp string is an irrefutable method for accruing return customers. Yet, these miniscule acts of brazen greed can nullify all other positive efforts.

Although the stigma of drip pricing applies to all its encompassing scenarios, there’s a wide degree of variation in reactions. Perhaps starting with water bottles and internet access weren’t the best choices. What about pet surcharges or discontinuing the complimentary breakfast? Are these met with the same chagrin?

Guests don’t like additional payments, at least ones they don’t understand. They don’t understand the cost allocation structure behind the $4 bottle of water or the $15 internet surcharge. Conversely, it’s common knowledge that animals make a mess and that food can have sharp preparation costs. Many will consent to fitness center charges if they plan to physically use the room, but do so regardless and you’ll meet only scorn.

Bringing It Back to the OTAs
So, what does all this have to do with the bargain-basement pricing model of the online travel agencies? Simple: their platform for displaying room rates propagates a hotelier mentality in which there’s no alternative to drip pricing. A hotel should never treat its relationship with the bland edifice of an OTA fiducially. Everyone’s doing it, so therefore we have to comply or we risk dismal income from this otherwise-lucrative channel. But solutions abound and indeed many properties may already hold the answer.

If part of the rationale behind consumer derision towards drip pricing concerns a gap in knowledge – that is, not understanding heavy markups or ancillary fees – then much of that can be fixed with a proper dissemination of information. Tell your guests why these charges are necessary for you to effectively operate. If your TripAdvisor score reveals numerous tirades against charging for local calls, place a card in every room next to the telephone that makes the price clear and offers a satisfactory explanation behind the price. The same for internet access fees, shuttle services and whatever else isn’t blanketed by the daily room rate. Knowledge is power after all.

This may work to mitigate minor grievances, but it isn’t a panacea. Ideally, all hoteliers dream of cutting out the middleman, but the OTAs are still fantastic tools for vacation brainstorming and comparison shopping. What I foresee as the real cures are exclusive brand.com deals and best rate guarantees. Make your incentives so lucrative that it’s impossible for customers to refuse. And advertise these promises so guests know where to go when they’re ready to spend.

Having a price parity policy will do you no good if it’s buried (like hidden fees) under a mile of red tape and in the sub-navigation on your website. Think the home page, in big, bold letters. Furthermore, highlight the fact that reward points and specific requests are only attainable via direct reservations. Social media is also an empyrean vessel for divulging this factoid, but the uses of these web networks don’t stop there.

Dangle exclusive deals and chances to win gift cards through Facebook. Drop limited-time sales on Twitter. Reward YouTube videos that demonstrate your property’s excellence. Discount rooms for those who spread the good word through Instagram. Give back to those who share. Be careful, though, not to offer too deep a discount; just enough to persuade potential guests that booking direct is the only way. In my ongoing battle to determine once and for all whether social media is a pro or a con for hotels, it would appear that these networks can actually help counteract other more malevolent forces.

Many of the major chains have preventive measures underway and it’s time the rest of us followed suit. Drip pricing proliferates because we don’t account for their long-term ramifications. Knowing your consumers and knowing how to entice them to be loyal to you and not a third-party will always be a step in the right direction.

(Published by Larry Mogelonsky in Hotels Executive December 12, 2012)

Larry MogelonskyOvercoming the Loyalty Erosion Problems of Drip Pricing