How surcharges affect pricing and purchasing

July 21, 2008 -- Surcharges — additional fees such as shipping and handling — are unwelcome but common charges that can shoot up the cost of online and catalog shopping. Yet how many of us base our purchasing decision on these niggling fees?

A lot more than you might think.

New research conducted by Amar Cheema, Ph.D., assistant professor of marketing at Washington University in St. Louis, suggests that consumers pay more attention to surcharges than what was previously thought.

In a paper published in the June 2008 issue of The Journal of Consumer Research, Cheema shows that how consumers think about and respond to these surcharges depends, in large part, on the seller's reputation.

The research, which holds important implications for businesses and their pricing practices, spanned four studies that looked at pricing data of online sellers, catalogs and service providers.

"Surcharges are often considered a way in which the seller can surreptitiously increase the price of the product," Cheema explains. "So, when buyers don't trust the seller — they're buying on eBay or from a web site they don't know well — they are vigilant of such tactics."

In many such cases, his research concludes, buyers will decide against making a purchase.

Cheema examined the effect of surcharges in two situations: (1) when surcharge is determined by the seller and the buyer decides whether or not to pay and (2) when combined price of the base price and the surcharge is offered to buyers who decide whether or not to buy.

The first study showed that bidders buying DVD trilogies on eBay from low-, mid- and high-reputation sellers were affected differently by the varying levels of surcharges. Consumers lowered their bids to account for surcharges when buying from low-reputation sellers but not when buying from mid- and high-reputation sellers.

Cheema

A second study examined partitioned vs. consolidated prices in cell phone service plans. Again, research showed that consumers examined their purchase more closely when buying from low-reputation sellers. In many cases, this scrutiny led to a suspicion of inflated price, lowering the likelihood of a sale.

The third study involved 119 student participants bidding for a designer scarf on eBay. Seller reputation was manipulated through seller feedback scores, and high and low surcharges were added. Participants recorded the time they took to complete the exercise.

The results revealed that participants took longer to make a decision when buying from low-reputation sellers than when buying from high-reputation sellers.

In the final study, which measured an individual difference — the need for cognition or information processing — 197 individuals were asked to consider the catalog purchase of an LCD computer monitor. Half of the participants closely examined surcharges while the other half relied on other factors — the catalog reputation, for example — to inform their decision.

The high-cognitive participants who were buying from low-reputation sellers paid attention to surcharges. The same group of participants buying from high-reputation sellers ignored the tacked-on fees.

Cheema concluded that surcharges were shown to affect buying only when participants are paying attention to the offer and the seller has low reputation.

Other key findings include the following:

• Sellers who divide the total price of a product or service into a base price and a surcharge could prosper when buyers ignore the surcharge.

• Surcharges levied by low-reputation companies lower purchase likelihood. Thus, low-reputation companies may benefit more by offering a consolidated price.

• High-reputation sellers can post higher surcharges to increase the total price paid by the buyer, but low-reputation sellers cannot do so effectively.

• Low-reputation sellers can benefit by absorbing the surcharge into the base price and offering a consolidated price for a product or service.

Editor's note: Professor Cheema is available for live or taped interviews using Washington University's free VYVX or ISDN lines. Please contact Cynthia Georges at (314) 935-5202 for assistance.

The paper is available at http://www.olin.wustl.edu/faculty/Cheema/CircSurchargeReputation.pdf