Many companies face the pricing strategy dilemma of whether to charge customer fees. Similarly to the concept of dynamic pricing, fee-charging can quickly stir customer animosity.
On one side, there is the precedent of the airline industry fee structure, which often leaves a sour taste in customers’ mouths…Want to check in luggage? Fee. Want to board sooner? Fee. Want to select your seat? Fee. Want internet access? Fee.
On the other side, there is the allure of higher profits since fee revenue can be extremely lucrative and help capitalize on services which would otherwise be included (i.e., free).
A fee structure could also be advantageous for customers, if implemented in a smart way. It allows organizations to tailor offerings to distinct groups of customers, providing options that suit their needs and budgets.
To make this work, customer segmentation is key. By dividing customers into groups based on their preferences, you can create fee structures that make sense for each group.
For example, going back to our air travel analogy, a frequent business traveler will potentially pay a fee to embark and disembark the plane quickly, or use internet service during a flight to continue working.
Meanwhile, on the same plane, a family with young children would be willing to pay extra to sit together or to purchase children snacks that had little toy surprises to play with.
Fees can help you customize the customer’s experience and give them better control of paying for what they care most about.
So how can companies best navigate these decisions? Here are some thoughts for you to consider:
- Avoid overwhelming your customer. Customizing your offering should not be an excuse from doing your homework on customer segmentation. Having some pre-planned packages, with a few options to add-on is efficient. Conversely, an extensive list of “a la carte” options to choose from can become overwhelming for most customers. If you have been in a fast-food restaurant where you “build your meal,” you can relate…choose your protein, choose your vegetables, choose your side, choose your toppings, choose your sauce, choose your drink. For most new customers, this can be a stressful experience.
- Identify your typical “buyer personas”. Understanding your customer segments can help you create more targeted combinations of your offering. By analyzing your historical sales data, coupled with some deep dives (e.g., focus groups, surveys) one can identify the main customer segments and their needs and preferences. For example, many automative manufacturers identify a particular customer segment which is interested in “sportier” driving. For this segment of drivers, they would offer a performance package, which selects the bigger engine, bigger brakes, more rigid suspension. There may still be some additional options to choose from (e.g., ceramic brakes, racing seats), but most of their wish list may already be addressed. Aim to have a few of these packages readily available to choose from and provide a few additional options if needed.
- Keep the fee “reasonable.” Of course, the perception of what is a “fair” price can be very subjective, but we have all seen instances where the add-on fee is just excessive. If you have ever tried to buy a product online to just find out at the checkout that “shipping” was multiple times the value of the product, you know the feeling. There are certain price points where most customers would expect the option to already be included in the base price, so charging extra for a basic feature could drive customer dissatisfaction.
- Understand your competition. It is sometimes easy to go overboard with pricing when you have a base price and many options to add on. Keep an eye on the additive aspect (base price plus all typical options), to ensure you remain market competitive.
- Avoid surprises and mandated fees. The most controversial fees tend to be ones that are imposed and come as a surprise. This includes surcharges and other fees that are not mandatory (e.g., not related to taxes or other governmental charges). If you must add a fee to every customer, make it visible upfront and explain what it is for (e.g., Uber’s surge fee). Anything added at the end of the checkout process and not driven by a customer’s choice, is likely to create friction. Examples are fees which appear only upon checkout, such as “resort fees” or additional hotel charges, service charges. For a B2C customer, this is an irritating experience. For B2B customers, very often this turns into underpaid invoices and write-offs.
By taking a thoughtful approach to adding fees, you can boost your revenue while keeping your customers happy. It is all about being thoughtful about your offering and finding the right balance. If you would like to discuss further your specific situation, please reach out.
