A Nov. 17 Business article incorrectly described a 1.08 percent property tax surcharge from Sprint. The surcharge is imposed on long-distance bills but not on Sprint PCS wireless service. (Published 11/22/02)
Experienced travelers know they've entered the world of extra taxes and fees the minute they hit the road.
First it's the airline, with a whole new world of surcharges: one for insisting on a real paper ticket, another for bags that are too heavy, or too big . . . or too many. And some carriers that once offered free beer and wine on transcontinental flights now charge $4 for a chardonnay or a can of Bud.
Then it's the rental car, with extra local taxes, the hard-sell "collision damage waiver," the charge for an extra driver and the ever-popular "refueling charge" should you not fill up the tank. At the San Francisco airport a $12 surcharge helps pay for the car-rental shuttle bus; a state-mandated $10 at Boston's Logan Airport helps fund the city's new convention center; and last month, also in Boston, Dollar Rent a Car slapped on a $1.84 daily "peak-season" fee -- "leaf-peeping season," you know.
Next comes the hotel. The Best Western in Annapolis charges $1 a day for the safe in the room, whether it's used or not. At fancier properties there are "resort fees," $5 or more a day, for local phone calls, pool towels, the daily newspaper -- things that used to be complimentary.
Tacking extraneous fees onto basic bills used to be confined to a few industries, most notably telephone companies and banks. And even those institutions have outdone themselves in recent times. Charter One Bank used to charge a monthly fee for its debit card. Now it offers the card free, but customers of the bank's free checking accounts had better use it three times a month or they'll get zinged with a $1.50 fee. Think they can dodge that bullet? Free-checking customers are charged $1.50 a month if they decline the debit card and take only an ATM card.
Meanwhile, for the privilege of paying a credit card bill over the phone, Citigroup charges $9.95. Pay your Washington Gas bill online and you'll pay extra, too; the bigger the bill, the higher the fee. For a $100 bill, the online charge is about $3; for a $200 bill, about $5.50.
It seems that almost every kind of business has found a way to tack on extra charges -- for almost every kind of service and product imaginable.
And sometimes these fees amount to far more than a few dollars or cents. At Virginia's George Mason University, for example, in-state undergraduates pay $2,375 in tuition -- plus an additional 60 percent, or $1,416, in fees.
Every day, in almost every industry, "I'm seeing a lot of add-ons," said Marc-David Seidel, an assistant professor of management at the University of Texas. Seidel knows what to look for: Five years ago he co-founded a Web site, ABTolls.com, to help consumers track all the various fees charged by long-distance telephone companies.
The telephone companies keep raising existing fees, such as the "universal service" fee -- while continuing to come up with new ones, Seidel noted. Among the newest add-ons Seidel points to is the "property tax recovery surcharge" of 1.08 percent that Sprint PCS added about a year ago to its long-distance bills. There's a reason for this nickel-and-diming: the weak economy.
"As the economy is going down, as it is right now, consumers are more price-sensitive," Seidel said. "So companies have a propensity to promote a low-price image. But they still need to maintain their revenues, so they find other ways to charge it, with lots of add-ons."
And there's another reason companies do add-ons: Consumers let them do it.
Most of the time, consumers don't notice the extra fees -- or feel they are so small, they don't care. There are only a few times when consumers have protested, most notably after Sprint decided to charge some of its PCS wireless customers -- primarily those with poor credit ratings who were on a special price plan -- $3 when they wanted to speak to a customer-service representative.
Sprint officials said that it was costly to provide a team of customer-service agents and that consumers could get the same information online or through the automated telephone system, both options free. Even so, the company dropped the charge a month ago after consumers complained.
But for the most part, "firms have come to realize that consumers don't seem to pay that much attention to fees," said Kent B. Monroe, a marketing professor at the University of Illinois and the author of "Pricing: Making Profitable Decisions."
The fees, surcharges -- call them what you will -- have another advantage: They make it look "like a lot of the fees companies charge consumers are not their fault, but someone else's," said Gene Kimmelman, Consumers Union's senior director for public policy and advocacy.
Just look at a telephone bill, he said. "There are a whole slew of charges for local taxes, national taxes and gross-receipt taxes. On the one hand, that breakdown of taxes gives consumers more information about what the government assessments are costing a business." But, Kimmelman asked, "why should certain taxes be separated and not considered a basic cost of business? And these same companies don't break down how much it's costing to fund a chief executive's compensation package, or how much they are paying for political lobbying. Companies are selectively picking what items to segment."
City and state governments are equally selective in picking their targets. Why else would car rentals, hotel stays and airfares have such a list of taxes and surcharges and fees, except that they are aimed at that special consumer, the traveler, who winds up paying fees -- for stadiums, convention centers and the like -- that government entities wouldn't dare charge constituents who could vote them down.
Monroe of the University of Illinois believes add-ons go back many years, to when mail-order retailers started to add shipping and handling fees to their bills. "Over time, they began noticing that consumers weren't sensitive to shipping and handling. So if they were only charging their cost of $1, some thought, 'Why not charge $2.50 and earn additional profits?' Buyers either didn't notice or felt the fees were small compared to the real price."
Computer technology has aided companies and financial institutions in assessing the extra charges. "It's a paradox. As companies move from paper to electronic transactions, it has cut their costs -- but also made it easier for them to charge fees because they can track every single transaction," said Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a grass-roots consumer lobbying organization.
Businesses say the added fees are the best way to manage rising costs and at the same time assign them directly to the consumers who use the services.
Airline costs have "risen rather dramatically" over the past two years, and paper tickets are "more costly to administer than electronic tickets," American Airlines spokeswoman Sonja Whitemon said in explaining the airline's decision to impose a $20 fee on customers who insist on old-fashioned tickets. Fewer than one-third of American's passengers opt for them, she said.
And "since there is only so much space and weight an aircraft can accommodate," there's "an additional fee for passengers who require more than the average."
Dana Chase, director of acquisition and retention in Sprint's consumer long-distance marketing division, said its property tax surcharge "reflected the cost of our business that we needed to recover." Chase added: "We felt it was better for the customer to add a special line item than adding it into the permanent rate."
Meanwhile, Virginia officials say they have no choice in imposing large fees on top of tuition at all of its state colleges and universities. As mandated by the state, tuition can cover only educational expenses. The remaining costs of campus life -- from dorms and cafeterias to health care and student activities -- have to be borne by "fees."
In some companies, executives say the added fees help them offer services they otherwise couldn't afford.
Steve Merchant, general manager of Best Western Annapolis, for example, said the hotel's safe fee allows him to offer an amenity "we might not have been able to offer." The hotel didn't have to pay anything to get the safes installed, he said. In return, the safe company and hotel evenly split the $1 daily fee. "It's not a lot of money, but it's a nice little help" to the hotel's revenue, Merchant said. He said he doesn't consider the dollar a fee but rather a "nice amenity for our guests -- security." And he adds that "we adjust the bill if the guest doesn't use the safe and objects."
But many probably won't. "People are busier than ever, and their time is so constrained that many are not willing to evaluate" their bills or compare costs, said Ron Wilcox, an associate professor of business at the University of Virginia's Darden School. Wilcox cited mortgage refinancings as a good example of where the extra fees are often an afterthought to the entire process. "Homeowners look at interest rates and points, but they don't spend a lot of time comparing other fees that make up the closing costs -- even though a lot of money is on the table."
So convenience is behind some fees. Citigroup started offering payment by phone -- for $9.95 per transaction -- after it saw a number of customers sending their payments by overnight mail. "That wasn't very economical, and our $9.95 fee is certainly better than a $15 to $20 overnight fee" as well as cheaper than a late fee, said Citigroup spokeswoman Maria Mendler. Citigroup late fees range from $15 to $35, depending on how much money is owed. And cardholders can always pay online, where payments are processed quickly without any fee.
In fact, some entire companies have been created on the growing demand for convenience.
Ticketmaster is one such firm. Buy a ticket through Ticketmaster for next month's Three Mo' Tenors concert and there will be an additional $10.60 charge for the $55 orchestra seat -- $7.35 goes to Ticketmaster for the convenience of buying the ticket without having to go to the box office, and $2.75 is for processing the order. (An additional 50 cents goes to DAR Constitution Hall, where the tenors are appearing.)
Ticketmaster officials say their customers are paying for convenience. "If you go to the box office . . . you don't have to pay a fee," said Hannah Kampf, a company spokeswoman.
Similarly, the company Official Payments Corp. was born primarily to process electronic tax payments. Only recently has it added Washington Gas to its list of national and local tax authorities. Official Payments spokeswoman Lindajean Cooney said some consumers like to pay online because it allows them to put their energy costs on their credit cards, which, in turn, gives them a few extra weeks to pay and may earn them frequent-flier miles. "This is not for everybody, but if it works for you," the option is available, said Cooney. All of the fee, she added, goes to Official Payments; none to Washington Gas.
Presumably there's profit built into the fee structure of companies whose niche is convenience. But a number of consumer advocates wonder whether the additional fees charged by other companies accurately reflect the cost of the service, which is what the companies almost uniformly say. Or are they a way to charge more without appearing to do so? Mierzwinski, for example, asks if it really costs Citigroup $9.95 to process a credit card payment over the phone. And Seidel criticizes hotels that have started to charge as much as $2 to connect guests to a toll-free telephone line, saying the charge is way too high. "It's pure profits." Similarly, he criticizes those hotel resort fees.
J. Howard Beales III, director of the Federal Trade Commission's Bureau of Consumer Protection, said, "There are some advantages for consumers to have those prices separated." By unbundling fees and not charging a single overall price, the various charges can be broken down and then imposed only on the customers who use a particular service. But Beales added: "It's obviously important that consumers know what it is they are going to have to pay. There's clearly a problem if those fees are not disclosed clearly and conspicuously."
The FTC has taken action against firms that haven't disclosed some fees, but the last such case was in 2001, when the agency settled deceptive advertising charges with Gateway Inc. and Juno Online Services Inc. The agency said both firms promoted free Internet service, even though some consumers incurred substantial long-distance charges to go online.
But fees also make it hard for consumers to comparison-shop for the best deal. The cost of the hotel room or the mail-order purchase or the rental car may compare favorably up front. But the "best" deal can be considerably less than best if that company is more aggressive about tacking on fees and surcharges at the tail end of a transaction or neglects to tell a consumer about them until the bill is presented.
As the number of fees -- and their amount -- seems to grow, a small countermovement is beginning to surface, Seidel said: "I'm starting to see a marketing backlash from certain smaller companies that are utilizing consumer frustration" over fees to gain new customers.
The Wyndham International hotel chain is a good example. It has launched a preferred-guest program that, among other things, offers free faxes, Internet service and telephone calls -- local and long-distance -- to any customer who signs up. And the cost of signing up is also free.
"Nickel-and-diming rubs people the wrong way," said Andrew Jordan, Wyndham's senior vice president for marketing. In fact, Jordan said, the added fees, particularly telephone fees, were "the number one complaint at the front desk" at checkout. Under this program, "there are no surprises on checkout."
And that, he said, is a way to build brand loyalty. It doesn't seem to be a money-losing proposition either, Jordan said, noting that the customers who sign up for this preferred service tend to spend 25 percent more than the average guest. And that, he said, "enables us to deliver the benefit."
But that fee-free policy is unlikely to become widespread, marketers say. Some travel industry officials say they wouldn't be surprised to see airlines charge passengers extra if they don't do transactions online or at a machine at the airport and insist instead on talking to an agent.
And Robert B. McKinley, publisher of CardWeb.com, which tracks the credit card industry, predicts even more fees ahead. For instance, he said, "if you lose a card, they may start charging you for a replacement." A few years ago, a few banks starting assessing extra fees when customers didn't use their cards. After consumers balked, the fees were stopped. But, he predicted, that could happen again: "There are no free rides in the credit card world."
Nor apparently, anywhere else.