The Fairness of Fees

I’ve been struck by fees over the past month of traveling and think it’s worthwhile to make a few comments about the pesky things.  Fees can be effective facilitator of increased profits.  But they can also drive customers to increase switching and higher price sensitivity if not used carefully.  There is a balance between excessive fees and fair ones that pricing professionals and marketers need to be aware of.

Last year, we moved our business and personal banking accounts to a local bank due to two things.  I started the move when the big bank we were working with started charging me a fee for a monthly wire transfer.  The was just $15 but I kept a big balance in my accounts and was a good customer.  It just didn’t seem fair.  I knew that it didn’t cost them anywhere near that much to handle the transaction (it’s all electronic anyway).  I met with the branch Assistant Manager and he said that he couldn’t waive the charge.  I knew that wasn’t true.  We were also getting lousy service on our business account so we moved all accounts to a local bank where we are dealing with a VP Branch Manager who had been in the position for quite a few years.  We now get great service and no extra fees.

What’s the message?  Fees can cause loyal customers to switch when they are perceived as not being reasonable.  What is reasonable?  Security fees on airline tickets are reasonable because of all that security we see at the airport these days.  Plus, all the airlines charge the fee.  Fuel surcharges when gas prices are high are reasonable but they’re not when the price of gas goes down.  We rejected several moving quotes this year because they were still charging the fees even though the price of gas had dropped over a buck.

Baggage charges for the airlines appear to be reasonable because of the handling of the baggage.  Plus, they often get charged to vacation travelers who are not high value, loyal customers of the airlines.  Me?  I never check luggage.  Even if I did, it would probably be on American and they waive the fee for their loyal customers.  That’s effective use of fees.

I have started flying a lot on Northwest (Now part of Delta) because they are the only direct flight to a new client.  Northwest has a fee of $20 for a better seat–a lot like Jet Blue.  On a recent flight, I noticed that they only had one regular seat for no extra fee–it was way in the back of the bus and a middle seat.  So, I paid the fee for an aisle seat up front–it was worth it because the aircraft was packed.  If it hadn’t been packed, meaning that the airline was not showing available cheaper but still better seats, I would have switched to American and taken the hop through Chicago.  Not the case here and I felt the fee was fair.  We had to change flights and had to pay a $50 change fee–again.  Fair?  Yes, but I’m feeling a little nickel and dimed by these guys.  If the fees continue, I’ll probably say the heck with it and start doing the indirect on American–do you get the picture here?  Even though we have a client paying the charges, I’ll still switch because I don’t think it’s fair!

Southwest has begun charging a $10 fee for those people who want to get to the front of the line.  For business people, it means a front row seat, a guaranteed place for the luggage and first off at landing–not a bad deal.  That’s a well chosen fee for a target market of people who will be willing to pay the fee and think it’s fair.  I do wonder what the impact will be on people who are the casual traveler–will they get angry when people pay to cut to the front of the line?  It should be interesting.

The bottom line is that fees are an important consideration for companies that are looking for ways to increase profits and charge for special services.  Whether to a general population or to specific segments, when those fees are viewed as fair—they can be effective ways to call out the special features and services that customers can receive if they want to pay.   When fees are viewed as unfair by an increasing percentage of the population, however, they can cause increased switching and a declining population of loyal customers–something that has to be monitored over time.  Yes it is tricky but if properly managed, fair fees work and can be a significant boost for profits.