Though by this point I shouldn’t have been shocked, I was nonetheless outraged that a colleague and I paid $57USD for one night of Internet access in our room and also we were expected to pay about $5.50 per minute to call another colleague on his London cellphone from our room phone. Oh, and adding insult to injury: we discovered that we had to pay separately for wireless Internet access downstairs; it wasn’t included in the $57 we had just paid.
So this got me to thinking: Why do hotels charge so much for such ridiculously minimal (and actually low-cost) incidentals and—more critically—how do they get away with it in a free marketplace? And what other industries feature such utterly obnoxious gouging?
As you can imagine, when I came across this article recently—The Hidden Economy—I was fascinated to read some justifications from economists about this very subject.
They explain that primarily two different types of people patronize establishments and services with cheaper up-front costs but higher per-use or incidental charges:
– The clueless n00b (except they politely call this person “myopic”) who simply doesn’t expect or even notice the high incidental charges at the “cheap” place or with the “discount” service.
– The savvy planner (someone who aims to be aware and beat the system by substituting others’ cheaper offerings to replace the main provider’s usuriously-charged services); this person reasonably believes he or she can actually save money overall by being a tightwad and purchasing incidentals elsewhere.
But what this article fails to address is the apparent inelasticity of business purchases. That is to say… even as the price rises, purchases of a business good or service often do not fall off proportionally.
Take the example of hotels, for instance. Contrary to the inverse relationship exampled in the article (low price hotel has high incidental charges and visa versa), my experience has shown a rather wacky but ultimately understandable proportional ratio of base charges to incidental charges. Specifically, the pricier the hotel is, the more outrageously high their incidental charges are while, conversely, places like Best Western have relatively low base charges and give away stuff like local calls and Internet access for free.
So why do companies—even generally thrifty ones—still often book their employees into the expensive-all-‘round hotels? I don’t think it’s for the amenities or overall comfort (frankly, I’ve found the “cheap” hotels often scoring better on both issues!). Rather, I’ve found that it seems to come down to proximity issues. The hotels attached to or near conference centers just seem to be damn expensive in general.
Of course, this shouldn’t be so surprising, eh? Time is productivity is money, and time spent schlepping from the conference center to one’s cheaper-but-distant hotel particularly takes time away from in-person networking opportunities and/or naps and so on.
* * *
With that said, though, I do wonder what would happen if there was greater transparency in hotel charges. If corporate booking agents for large companies—undoubtedly reasonably cognizant of cost control issues and cost/benefit analyses—were able to quickly compare total expected business-related costs for a stay (e.g., Internet access + breakfasts + a bit of printing or photocopying), might the difference finally tip the scales in favor of the slightly-more-distant hotel? Or ultimately even result in slightly more sane incidental charges at the near-conference-center hotels?
For instance, say it’s $270 a night at the Hilton and $170 at the Best Western. Okay… a thoughtful manager or travel planner might weigh the difference and decide… hmm… I can see my employees, especially if sharing a room, gaining well over $50/day productivity and serendipitous networking encounters by being “close to the action.”
But after meals and incidentals, if the costs are respectively $350 and $175, then the choice becomes a bit more difficult, right?
* * *
I suppose the same question of the value of transparency could be asked for other industries in the context of business, but at the moment, it seems like other choices are generally already more transparent. When we move into the realm of consumer purchase choices, then I agree partially or largely-hidden charges are far more common (in credit cards, telecommunication services, etc.), but in that case I think the base price compared to incidental charges more closely follows the gameable inverse relationship noted in the article above.
So, then, some questions for you…
1) What are some other examples of largely-hidden charges in popular business or consumer services? Do you think greater transparency of these these charges will result in them being lowered over time, or will something else reduce them (gov’t intervention?) or will they remain relatively high?
2) Other than business-area hotels, what are some other examples of relatively inelastic service/product purchases with high incidental charges?
3) And on a more fun / less wonky note… what’s the most ridiculous amount you’ve paid for an item or service in the context of a larger product/service? (Mine has to be an $11USD pineapple juice at the top of a large building in Singapore. I was excited that the base price—for traveling up the elevator to the site-point—was free! But the incidental cost associated with being required to make a purchase at the top was a bit shocking to me, especially given that I had just enjoyed many glasses of fresh-squeezed juice for 50 cents each that same day :-P)