Hidden Fees vs. Fair Value: Can True Pricing Bridge the Gap?

The benefits of True Pricing- What would True Pricing change from the current hidden pricing system?

Price plays a dual role in the formation of a product’s perceived value by consumers. Perceived value comes from a trade-off between attributes perceived as benefits or as sacrifices. Price can be seen as a sacrifice, as it constitutes the financial cost a consumer pays to purchase a product. Sustainable products typically necessitate higher development costs.

In today’s consumer-driven world, pricing transparency has become a crucial factor in making informed purchasing decisions. However, the prevalence of hidden fees has made it increasingly difficult for consumers to truly understand the total cost of a product or service. Hidden fees, also known as undisclosed charges or extra costs, are additional expenses that are not openly disclosed upfront but are later added to the final bill. These fees can range from minor inconveniences to significant financial burdens, leaving consumers feeling deceived and frustrated. In this section, we will delve into the world of hidden fees, exploring their impact on pricing transparency and providing insights on how to identify and avoid them.

All products—conventional and sustainable—have such hidden costs that are not reflected in the retail price. However, they are lower for sustainable than for conventional products, the latter being more detrimental to the environment.

From a theoretical point of view, the answer is promising: Communicating true costs means introducing external reference prices that provide a benchmark for consumers to assess price acceptability.

We are in a climate crisis, which is also a consumption crisis. A major problem is that the prices of sustainable products are generally higher than those of conventional products. Although many consumers see a quality advantage in sustainable products, they ultimately choose the conventional option—simply because of the lower price a phenomenon also known as the “attitude-behavior gap” or “green gap”. Companies must find ways to encourage more sustainable consumption.

In this context, we look at a price-related marketing tool increasingly being used in practice and causing a stir so-called true cost campaigns that communicate “true costs” of products by displaying them next to the regular retail prices that consumers continue to pay. The product’s true costs represent the price that consumers would theoretically have to pay if the hidden costs to compensate for all environmental and social impacts that affect soil, climate, water, or health were considered in the product’s value chain.

The market price of products reflects only a limited share (between a third and half) of their true cost if we take into account the negative externalities associated with their production, distribution and consumption.
These harmful impacts 50% of hidden costs on average, the environment 30%, and the economy 20%. These figures vary due to the territorial diversity of systems.

Integrating part of these costs into the price of products involves adopting policies that address the issue of vulnerable right of the populations.

Aristotle considered the fair price to be the result of a natural trade allowing a community to meet its basic needs, in contrast with trade conducted to accumulate wealth beyond these needs, characterized by excessive prices.

This understanding was subsequently adopted by the Scholastics, who advocated a commutative justice whereby equality had to prevail in an exchange.

What is a fair price? That has become a vitally important question in today’s era of transparency. Customers have the means and motivation to share and compare prices directly, and companies have the means and motivation to personalize their prices so they are in line with the measurable value they provide to individual customers.

While there are no standard answers to the question, business leaders can embrace market transparency, understand what drives the perceptions of fairness in their market, and ensure that they offer prices that customers will perceive as fair. With the right understanding and the right approach, companies can vary prices in ways that mutually benefit themselves and customers, and perhaps society as well.

Hidden fees can be found in various industries, from airlines and hotels to telecommunications and banking. Let’s take a look at a few common examples that highlight the prevalence and impact of these sneaky charges:

Airline Fees, Hotel Resort Fees, Cell Phone Bill Add-Ons and Telecommunications companies are notorious for hidden fees, such as activation fees, early termination fees, and data overage charges. These additional costs can quickly accumulate and catch customers off guard, resulting in unexpectedly high monthly bills.

While hidden fees can be challenging to navigate, there are strategies to protect a consumer. Here are a few tips to help you identify and avoid hidden fees.

Let’s dive into some common types of hidden fees you should be aware of:

Service Fees, Cancellation Fees, Bank and Credit card Fees, Shipping and Handling Fees, Utilities and Subscription Services etc.

There are some recommendations to reduce hidden costs and get closer to fair prices.

Capitalism only promotes the common good when the invisible hand is restrained and complemented by the highly visible hand of the State.

The explosion in the hidden costs worldwide calls for rethinking the role granted to the market in optimizing the alignment of supply and demand. The “fair price” of should include part of the hidden costs, so as to make all system actors accountable: workers and manufacturers, shopkeepers and restaurant owners, and consumers. This paradigm shift involves supporting populations with low purchasing power through a policy of solidarity to guarantee the right of all to quality. To break the cycle of globalization of markets and economic deregulation – with its worrisome consequences– a consensus is emerging within the scientific community and civil society to recommend the path of socio-ecological transition, which necessitates new policies. Following a shared governance approach, such policies will be defined and articulated on different geographical scales: regions, States, and global through intergovernmental institutions.

True Cost Accounting technique for calculating the value of goods and services based on an estimate of the hidden costs not included in the market price. These costs are split across three categories, each associated with a key area of sustainable development: 1) social costs 2) environmental costs 3) economic costs. Based on the diagnoses established, this brief formulates recommendations for public policy and stakeholder strategies.

Hidden costs is the term used for non-visible costs associated with the production of the items and may include external aspects such as environmental pollution, depletion of natural resources, or social costs such as forced labor or violations of workers’ rights.

A product may appear cheap to the consumer but could cause significant environmental damage or be produced under poor working conditions.

Those hidden costs are always present and often still have to be paid. It is usually the taxpayer who pays for the non-visible costs, and that taxpayer is the one who buys the product.

By making the fair cost of products visible, companies that do well for the environment and society will become more competitive compared to the less sustainable alternatives. This way, companies/manufacturers will be encouraged to be more sustainable. At the same time, ‘real prices’ will also make it easier for consumers to make a fair trade-off and make conscious choices when shopping.

 “First of all, one needs to identify what the real costs per product. In a nutshell, this is the formula of True Pricing: market price + hidden costs = the true price.

Companies must price goods and services according to the laws of competition: price too high and competition, no matter how essential the service, will drive profits down, as consumers flock to other sellers in the market. Nevertheless, companies can hold onto pricing power if they obfuscate prices and pricing calculations.

The expectation of hidden fees makes it harder for new cost-cutting competitors to enter the market since consumers just expect to be saddled with fees no matter what they do. Due to prior hidden fees in a particular industry, consumers are conditioned to think that a low price just means they will face fees at checkout. Therefore, they are wary of the low prices of a new competitor.

To Avoid Hidden Fees:

– Always read the terms and conditions before making a purchase or signing up for a service.

– Compare prices from different providers to ensure you’re getting the best deal.

– Ask questions and seek clarification about any fees you don’t understand.

– Consider using apps or tools that can help you track and manage your subscriptions and expenses.

– Be diligent about checking your financial statements regularly for any unexpected charges.

Charging different prices is often fairer than charging everyone the same price. Companies should take steps to educate customers and win their support for this approach.

Let’s take a closer look at price discrimination that favors seniors, students, or low-wage earners—three groups that tend to face physical, social, or financial hardships.

Most societies—whether in the developed or developing world—consider it to be fair for seniors to pay lower prices. In the US, seniors can get discounts at several national chain restaurants starting at age 55, and even deeper discounts if they are a member of AARP, which one can join at the age of 50. Such age-based price discrimination often comes together with time-based discrimination. Several restaurant chains typically offer senior specials on Sundays or Wednesdays, while the chain Golden Corral varies prices for seniors by the time of day with its early-bird discounts.

Three Recommendations for Solving the Paradox

Business leaders have an opportunity to step back and think about fair prices more consciously and deeply. The following three recommendations can work here.

Embrace price variation. Price discrimination is a strong and significant pricing lever that business leaders should use more confidently. They have a lot of latitude in most societies to vary prices in ways that the majority of people will perceive as fair.

This has several implications. First, a fair price is not synonymous with an equal price for all. That does not mean uniform prices as per unfair. Uniform prices make practical sense, for example, for low-margin products when customers’ willingness to pay clusters around one value or lies within a narrow range. But as the perceptions of value widen—and, thus, the variance in willingness to pay increases—companies have a greater incentive to vary their prices. They can stop searching for the ideal uniform price and, instead, look for price variations that benefit both customers and the company.

Leaders have latitude in most societies to vary prices in ways that most people will perceive as fair.

Be accountable for the company’s justifications. Price variation works to the benefit of buyers and sellers when the buyers believe that the justification for the variation is valid. That means that price variation requires a communication strategy that makes the justifications positive, transparent, and explicit. These justifications can focus on aspects such as the differences in the cost to serve or the various behaviors that buyers themselves can influence. Buyers also generally accept membership in a customer loyalty program or participation in a buyers club as reasons that justify why some people may receive lower prices.

Price variation works when the buyers believe that the justification for the variation is valid.

Using supply and demand imbalances to justify price discrimination is a more sensitive area for consumers. They generally accept supply and demand as a valid argument when price differences are relatively small—in the range of 20% to 25%. But when companies try to use the argument to justify extreme price differences (100% or more), it leads to accusations of price gouging, which not only angers customers but also makes them skeptical of the supply-and-demand argument.