Imagine that you need to buy a new textbook for class. You find it on the publisher’s website for $49.95 plus $4.95 shipping. You do a quick Amazon.com search and find it there for the price of $54.90 with free shipping. From which site would you prefer to purchase the textbook?
Ask an economist this question, and he or she would say that the two offers are equivalent because the total price paid, $54.90, is the same. It should not matter whether part of the price is allocated to shipping and part of it to the textbook because the total out-of-pocket cost is identical. Yet research on consumers continuously shows that they consistently prefer the offer in which the book is priced at $54.90 and shipping is — theoretically — free.
Why is this the case? When a price is divided, or partitioned, into multiple components, it draws the consumer’s attention to each individual aspect. Looking at the publisher’s website, consumers evaluate whether paying $49.95 for the book, and then $4.95 for shipping, is a supposedly good deal.
Experiments my colleagues and I have conducted suggest that consumers feel they derive more benefit from some components, such as the products they buy, than from other components, such as shipping. As a result, consumers are more sensitive to the prices of the low-benefit components (shipping) than to the prices of high-benefit components (the product). In other words, paying $49.95 or even $54.90 for the book feels like a good deal while paying $4.95 for shipping feels like a bad one.
One implication is that consumers can often be convinced to buy products they don’t really like just to avoid paying for shipping. For example, a recent survey conducted by Georgetown’s Institute for Consumer Research asked consumers to imagine they were purchasing a product online and decide whether to pay $5 for standard shipping, pay $7 for expedited shipping or buy another product they were not very excited about for $10 to get free shipping. Over a third of the respondents chose to add the $10 product to their shopping basket to avoid paying the extra fee.
Why does paying for shipping feel like a bad deal to consumers? One reason is that shipping is not something we’re accustomed to paying for when we buy offline. Although both online and offline retailers incur costs for shipping, offline retailers don’t call these costs to our attention. They bundle the costs of shipping merchandise to their stores with other costs such as paying for the products, paying their staff and paying for their retail space when they set prices. Thus, when consumers compare buying a product at a store down the street to buying a product online, shipping costs charged by online retailers stand out.
Over the years, online retailers have learned to compete by offering free shipping. Moreover, as we see from the results of the GICR survey, imposing thresholds for free shipping encourages consumers to add products to their shopping baskets, further increasing revenues.
Doesn’t this logic then suggest that the way of shipping fees? Why are there so many extra charges added to your mobile phone bill, airline tickets and hotel stays?
It’s primarily because these charges are not very visible when consumers are making purchase decisions. (In contrast, consumers often abandon their online shopping carts when shipping fees are added.) For example, when choosing a mobile provider, consumers tend to focus on the monthly rate and underestimate the total price including taxes and other charges, which, according to CNN, made up 17 percent of the average consumer’s bill last year.
Unfortunately, by the time consumers see the total price, it’s too late — they’ve already signed the contract, used the service and received their first bill. The Federal Trade Commission calls this “drip” pricing, a practice in which firms advertise only part of a product’s price and then reveal other charges later.
In 2012, I participated in an FTC roundtable on drip pricing practices. Later that year, the FTC sent a letter to 22 hotel operators warning them that their online reservation systems may violate the law by providing a deceptively low estimate of the total price.
Fortunately, some websites help consumers compare total prices by additionally computing taxes and fees for mobile phone service, flights and hotels.
What can we learn from these studies of consumer behavior? Although the best shoppers add up the total price and compare totals across providers, most of us tend to focus on what is drawn to our attention. Even after conducting years of research on price presentation effects, I still hate paying for shipping.
When shopping online, try to remind yourself to check for hidden fees, compare total prices and leave your feelings about paying for shipping out of the decision. Often, it’s a better choice to pay the extra fee than to spend money on a product you don’t really want.
Rebecca Hamilton is a professor of marketing in the McDonough School of Business.