Problems with the Fee Model [...]

Offering insufficient basic service for a flat price with fees for upgrades seems like a smart move in a number of ways. For one, it shifts the burden of certain amenities onto the people who actually use them. Why should you subsidize a companies “backup” feature, for example, when you aren’t using backups? However, as experience in the airline indstry has shown, it can create the wrong incentives for both consumers and businesses. The New Yorker investigates. (Link)

But the fee model comes with systematic costs that are not immediately obvious. Here’s the thing: in order for fees to work, there needs be something worth paying to avoid. That necessitates, at some level, a strategy that can be described as “calculated misery.” Basic service, without fees, must be sufficiently degraded in order to make people want to pay to escape it. And that’s where the suffering begins. (Source)

Here’s some of the hidden costs of fees:

  • Baggage Fees. We are not rational creatures. So to avoid a $25 baggage charge we will invest $40 of our time packing clothes into a smaller bag, $10 on smaller toiletries that can get through security, and another $20 on whatever we forgot. As a group we’ll also shove increasingly more into overhead bins which means slower loading and unloading of the plane.

  • Rebooking Fees. We’re increasingly assessed hefty rebooking fees which go far beyond what it costs a company to rebook. Because we discount future trouble, we ignore the rebooking fees when we book, leading to suboptimal behavior. (Delta and United collected nearly a billion dollaars of rebooking fees in 2014).

The biggest problem, however, is on the business incentive side. In an everything included model, each company competes on the best overall experience of the customer.

In a fee-based model, the way to make money is to increase the differential between the economy ticket and the ticket-with-benefits. One way to do that is to create new and exciting benefits. But the easiest way to do that is to take things that should be included (humane boarding, reasonable rebooking policies, some level of refreshment on the plane) and moving those to different fee based tiers.

In other words, you get rewarded for making the basic ticket people miserable.

See also Hate-Selling

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