A Business Technology Place

Guidelines for extra fees on Internet purchases

A common challenge for marketers is to determine how to position extra fees on Internet purchases.  A business may will incur additional costs for product or service after the initial pricing is set.  Examples include labor costs, materials costs, packaging, third party increases, etc.  So what’s a marketer to do when this happens? Do you raise the product price? Do you set an extra service charge? On an Internet store front, a business needs to present and position any extra charges in such as way so as to minimize the impact to conversion rates and customer experience. That’s a given. But what are some guidelines to follow when setting extra charges on Internet purchases?

The Direct Marketing Association provides guidance for establishing and substantiating shipping and handling charges.  I’d summarize their advice by saying marketers need to substantiate their charges and be transparent to customers. Those that don’t will ultimately hurt themselves through lost customers and bad reputation. Some other good advice is found from the knowledge within the LinkedIn community.  I combined this input with my own experiences to develop a set of guidelines for putting extra fees on Internet purchases.

Presentation Options for Extra Fees

Considers these options carefully if you are weighing a decision to show additional fees/charges. There isn’t a set right answer on the best way to do it. You’ll need to consider what the charge represents, price elasticity of products and shipping, and even industry pricing standards. This list of presentation options is written without preference. I’m just establishing the available options:

  • Add the charge to the product price
    • Pros
      • Customer doesn’t feel “nickel and dimed” with additional charges.
      • Keeps pricing simple
      • Don’t have to worry about positioning elements on the user interface
    • Cons
      • Additional fee may push the product price above market standards
      • Competition may be able to take advantage of your price increase if they don’t have the same expense

  • Show as a separate itemized item
    • Pros
      • Price composition transparency to the customer
      • Assists with covering needed expenses to keep the business financially healthy
    • Cons
      • Positioning on the user interface can be tricky. Testing different options takes time to measure the optimal method.
      • Customers may abandon if they feel the extra charge is not justified
  • Add to the shipping charge
    • Pros

      • If the additive fee is related to shipping and handling then you may combine this with the delivery cost.
      • It’s not uncommon to see shipping and handling as a single fee.
      • If you position delivery correctly it can be a competitive differentiator (See Zappos.com)
    • Cons
      • It’s widely documented that shipping and handling is the number one reason for cart abandonment. Be Careful!
      • You should definitely run an A/B test to see how customers react to combined versus separate charges in this area.

Guidelines for extra fees

  • Show the charge as soon as possible – preferably first time pricing shown. Nobody likes surprises associated with their final transaction cost. Here’s what I found recently on Ticketmaster while I was looking for some tickets to a sporting event. Not just one additional charge, but 2!

Ticketmaster surprise!

Ticketmaster surprise!

  • Provide an easy to find explanation for the charge – There are a couple of techniques to do this. Have the label be a hyperlink or provide a link beside the price such as “what’s this?”. It’s fine to put the explanation in your FAQ section. But don’t make the customer find the FAQs. Give them a reference link associated with the pricing display.
  • Explain what comprises the charge – In other words, be transparent. The Direct Marketing Association gives a nice reminder that your charge should be based on actual costs as best as you can determine. This is not an area to be making profit. State your costs to the customer to help them trust you and to understand the charge. By the way, this is where I have a problem with the Ticketmaster convenience charge shown in the first guideline. When I changed the pricing zone for the ticket, the amount of the convenience charge changed too! Here’s how Ticketmaster explains this fee:

Convenience Charge: (taken from http://www.ticketmaster.com/h/help.html?tm_link=tm_i_help Nov 23, 2009)

This fee covers costs that allow Ticketmaster to provide the widest range of available tickets while giving you multiple ways to purchase. Tickets are available in many neighborhoods via local ticket outlet locations, our telephone reservation system and Ticketmaster.com. Tickets can be purchased through at least one distribution channel virtually 24 hours a day. The convenience charge varies by event and is determined by negotiations with arena operators, promoters and others, based on costs for each event.

  • Explain how to avoid the charge Depending on the reason or basis for the charge, it may not apply to all customers. If there is a way to avoid the fee then tell the customer in the explanation.
  • Don’t show the charge if it doesn’t applyI debated on this guideline. There’s some consumer psychology involved with showing a charge as $0.00. You should test this on your site, but I prefer a cleaner experience that doesn’t mention extra fees if they don’t apply.
  • Measure performance and impactThis is a given with any Internet site change. The point is, you will have options on how to best label, position, and substantiate an extra fee. See which options deliver the best conversion and least amount of customer questions.
  • Monitor customer feedback Ok, another given. But it’s the one that many overlook or the first one to be cut during rough times. Make sure to monitor customer feedback from several sources including surveys, blogs, twitter, and phone.
  • Repeat the charge each time pricing is shown Don’t allow a customer to see the price without the charge and then later show it again on the last step before order submit. Go ahead and repeat each time the price is displayed on your site.