The ACCC wants to take the drip out of pricing

Companies that use drip pricing to lure customers in are being watched closely by the ACCC. theloushe/Flickr, CC BY-NC-ND

ACCC Chairman Rod Sims has put drip pricing in online markets on the regulator’s hit list for the year ahead, warning there would “shortly be enforcement in this area”. It’s a welcome and overdue move.

Drip pricing is the practice of disclosing only incrementally the various fees and charges consumers must pay for goods or services, rather than making them clear at the outset of a transaction. Although not limited to online markets, it’s online where the consumer often only discovers the full cost of their purchase at the end of a lengthy process. A personal example; when booking a car rental online last year we were attracted to a large company’s headline daily rate. When collecting the car we discovered additional charges could be levied including:

  • “Premium location” – renting at an airport
  • “Credit card fee” – fee for using a credit card (hard to avoid when booking online)
  • “Administration fee” – to help offset the firm’s administration costs
  • “Vehicle registration recovery fee” – to help offset the cost of registering vehicles

Other examples that have attracted attention include additional fees for printing a ticket to an entertainment event booked online or having it emailed to you, booking fees and fees for an allocated airline seat.

Drips are everywhere online

Drip pricing has become a business norm in online markets. Unscrupulous firms use it to misleadingly entice consumers to their product by offering a very low headline price and only revealing its true cost later. In these cases they expect the consumer to have invested so much time and effort in the transaction that they will complete it anyway. As well as duping consumers, this distorts the competitive process by making it impossible for them to efficiently compare the prices of competing firms before making a purchasing decision.

Firms may also use drip pricing to engage in what is sometimes called “a la carte pricing”. This is the practice of catering to differing consumer demands by allowing people to add separate services with fees to the cost of a base service; for example, a hotel charging extra for internet access or parking, or an airline for in-flight entertainment, baggage, or refreshments. This can benefit consumers and businesses alike by enabling consumers to acquire and pay for only what they want and businesses to compete on this basis.

Companies may also engage in drip pricing because marketing research has shown consumers tend to underestimate the total price of goods or services, and hence are more likely to proceed to purchase if that price is broken into components. This is so even though the price of each component is revealed and the total price can be ascertained easily by adding them together.

As we have noted, drip pricing can be used deceptively to defraud consumers. Typically, this will occur in a manner which, although infuriating, will involve such relatively small amounts that immediate retaliation by the consumer is not provoked. On the other hand, the accumulated value of those small amounts can make it a highly profitable for the perpetrator. For this reason, the promise of ACCC intervention is to be welcomed.

But given drip pricing can also enable firms to better respond to consumer preferences, care needs to be taken against reacting against all its manifestations. Fortunately, the provisions of the Australian Consumer Law (ACL) mean the ACCC can approach the issue with the subtlety required.

What the ACCC can do

Its first weapon is misleading and deceptive conduct, as defined in section 18 of the ACL. Any firm using drip pricing in this manner will be exposed to civil liability and a range of enforcement and remedial responses including being subjected to an award of damages, an injunction regarding their future conduct, adverse publicity orders and compensation for consumers. This section has been interpreted broadly; importantly, it can be contravened if consumers are misled at the outset of a transaction. So it’s no defence for the firm to show that by the end of that transaction the consumer knew their true position. It is also not necessary to show that a firm’s pricing actually misled anyone; it is sufficient if it was likely to do so.

A second weapon is the ACL’s prohibition of component pricing. This addresses the inclination of consumers to underestimate the real cost of an item, where this is divided into components, by requiring suppliers to prominently specify as a single figure what the consumer must pay. For example, it would be an offence to price an item as “$100 + GST” without also showing equally prominently that the total price is $110. However, this prohibition exempts charges that the consumer can elect not to incur, so that the benefits of a la carte pricing are not threatened.

A third weapon is the section of the ACL which makes it a criminal offence to make a false or misleading representation about the price of goods or services. This means anyone who in the course of their business uses drip pricing to mislead consumers about what they will eventually pay for goods or services is exposed to criminal liability.

In short, companies using drip pricing need to be aware of its potential to contravene the ACL, the severity of the consequences of doing so and that the ACCC is watching.

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