Take a close look at your receipt the next time you buy some tunes at Amoeba Music in Hollywood. You’ll see a 35-cent charge tacked on for “wages & benefits.”
That’s not a state or local tax. It’s the company simply reaching a little deeper into your pocket to cover its costs of doing business.
Chris Carmena, Amoeba’s general manager, told me the 35-cent charge helps defray expenses related to minimum-wage requirements, paid sick leave and workers’ healthcare.
“It obviously doesn’t cover all of our costs,” he said, “but it helps.”
And you know what? I’m fine with employers passing along the expense of providing a living wage and benefits to workers.
What I don’t like is the sneaky way many companies tack on surcharges rather than simply raising prices.
It’s a growing trend in the business world — and routine for wireless carriers, airlines, hotels, restaurants and other companies that do everything possible to trick customers into thinking they’re paying less than they actually are.
“It’s well understood that consumers tend to focus on the first part of the price, the base price,” said Ryan Hamilton, an associate professor of marketing at Emory University.
“They discount the surcharges, all the extra fees, once they’re presented,” he said. “At that point, they’ve already made the decision to buy.”
Businesses know this, just as they know consumers are more likely to purchase a product that costs $9.99 rather than $10. And they exploit customers’ willingness to be psychologically manipulated.
Vicki Morwitz, a business professor at Columbia University, said splitting costs into a base price and surcharges is known in academic literature as “partitioned pricing” or “drip pricing.”
She said companies “aim to have base prices that are lower than their competitors’, even if their total prices, including surcharges, are higher.”
“Consumers sometimes do not even notice the surcharges,” Morwitz added. “And when they do notice them, they tend to assume they will be the same for all competitors, like taxes. But they are not.”
Take a look at your wireless bill. There’s the base price for monthly service. But there are also a slew of taxes, fees and surcharges.
Some are required by the government. Others are just deceptive ways that service providers pass along their normal business costs in the guise of seemingly mandatory add-ons, rather than including them in the overall charge.
Last year, AT&T more than doubled its monthly “administrative fee” to $1.99 from 76 cents. The company said at the time that the fee “helps cover costs we incur for items like cell site maintenance and interconnection between carriers.”
Those would seem to be fairly routine costs for anyone operating a wireless network, and thus the sort of thing you’d include in your base price. AT&T apparently figured that customers wouldn’t mind kicking in an extra $800 million in annual revenue if this price hike was presented in the form of an official-sounding fee.
The Tax Foundation estimated last year that taxes, fees and surcharges now constitute about 19% of the average wireless bill — which means the base price is 19% lower than the actual service cost.
This practice makes it harder for consumers to comparison shop. It also places a needless burden on consumers to constantly solve math problems in their head to determine actual prices.
“Sure, consumers could break out their calculator and see through the trickery, but many of us don’t have the motivation, time and/or energy to do that,” said Scott Rick, an associate professor of marketing at the University of Michigan.
“If you’re shopping with an impatient child or an impatient spouse or both, you’re going to be especially vulnerable to partitioned pricing,” he said.
The solution, Rick and others told me, is a law requiring that consumer prices be all-encompassing — that is, the shelf price would include all costs, including taxes and fees.
It’s not such a radical idea. The European Union says consumers “have to be clearly informed about the total price, including all taxes and additional charges.”
In other words, the price you see listed in European stores is generally the price you’ll pay at the cash register. This creates a level playing field, forcing businesses to compete head to head on pricing.
In Southern California, where sales taxes can vary from city to city, it would have the added benefit of revealing to consumers why a granola bar in Pasadena (10.25% sales tax) is more expensive than a granola bar in Westlake Village (7.25%).
Ravi Dhar, director of the Center for Customer Insights at Yale School of Management, said the danger of all-inclusive pricing is that it can create “an excessive negative response” among consumers. Which is to say, it could deter some people from making a purchase because prices seem too high.
The reality is that it would introduce fairness to the marketplace by making prices accurate.
And don’t get me started on the archaic custom of tipping, which makes the idea of accurate pricing all but moot. Make restaurant prices comprehensive and pay workers a living wage — and spare us the growing trend of slipping surcharges onto bills and still expecting tips.
As it stands, American consumers are kept perpetually in the dark about true costs, relying primarily on artificially low base prices for shopping and comparisons.
Back at Amoeba, Carmena, the general manager, pointed out that the store’s 35-cent surcharge is clearly disclosed at the register and that customers can opt out of paying it if they want (although it kind of stinks making people choose to be uncool, seeing as we’re talking about wages and benefits).
He explained that the surcharge is actually good for customers because it’s not levied on each item purchased. If you buy three albums, the total transaction still costs only 35 cents more, not an extra $1.05.
“We feel that our prices are competitive with the market,” Carmena said. “Raising our prices across the board would put us in a position where we’re not competitive with other retailers and the internet.”
I get that. And I sympathize with bricks-and-mortar retailers such as Amoeba that offer a superior shopping experience — seriously, great store — but are still expected by customers to match Amazon’s prices.
Even so, there can be no true competition until both Amoeba and Amazon are required to offer all-in-one pricing and their respective total prices speak for themselves.
It’s not about making life more difficult for businesses. It’s about making markets more transparent.
And a lot more honest.