How Clients Can Guard Against Junk Fees
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In his State of the Union address, President Biden announced his intent to “take on junk fees.” These are the hidden fees involved with many of the services we purchase. I have written previously about undisclosed fees related to investments (annuities, private REITS, partnerships, etc.). Hidden fees are also found in service industries such as airlines, restaurants, hotels, and utilities.
Why don’t sellers of services transparently list one price that includes all fees? The main motivation is psychological. Sellers often wants to attract customers by appearing to offer the lowest price, even when they charge the same as or even more than their competitors. One of the cognitive biases they use is anchoring.
For example, if one airline offers a fare at $600 and another offers the same routing for $450, our fast-acting “limbic brain” automatically anchors on the $600 fare and assumes the $450 is the better buy. It takes a shift to our slower thinking “cognitive brain” to grasp that the $600 fare may include all the services that are added as fees to the $450 fare.
A consumer who takes the time to read the details of the $450 fare may learn that early boarding costs $50, reserving a seat is $60, a window or aisle seat is $30, one checked bag is $50, and a carry-on bag is $30. These added fees total $220, which would bring the $450 fare to $670. That’s $70 more than the seemingly higher $600 fare.
Similarly, at first glance a $200 hotel room with no resort fee appears to be more expensive than a $160 hotel room with a hidden $50 resort fee. A $50 daily car rental fare with taxes included looks higher than a $40 daily rate with a hidden airport tax of $10 and additional taxes of $8.