Pricing is often described as the least understood and most ineffectively applied element of the marketing mix. Nevertheless, it is critical to business success and viability (Potter, 2000). A common pricing method is “product bundle pricing” or “price bundling,” in which providers combine several products or (complementary) services in a bundle for a single, combined price (Ancarani et al., 2009, Lee et al., 2011, Yan and Bandyopadhyay, in press and Yan et al.,). In recent years, however, businesses in various consumer service industries have changed their pricing strategies significantly to a model called “à la carte pricing”. That is, firms have begun to unbundle their service offerings by introducing so-called “ancillary fees” for supplementary services that were previously provided as “free” (Ancarani et al., 2009, Harris, 2011, Marshall, 2006, Martin, 2011, Orwoll, 2010 and Smith, 2011). For example, many airlines in the United States and elsewhere now charge fees for checked baggage, priority boarding, and more legroom. In the hotel industry, new fees have been introduced for housekeeping, room-service trays, and bellhops—services once thought to be part of room rates (Martin, 2011). More recently, large banks in the U.S. (e.g. Chase, Wells Fargo) have started to charge customers new fees, e.g., for paper statements and debit cards (Siegel Bernard and Protess, 2011). Such ancillary fees have become a significant source of revenue. Airlines collected more than US$3.3 billion in baggage fees and more than $2.3 billion in reservation and cancelation fees in 2011; in the hotel industry a record of $1.85 billion in fees were collected (Rosenbloom, 2012). However, as widely reported in the media, the introduction of fee-based pricing practices has led to increased public displeasure, frustration, anger and outrage (ConsumerTravelAlliance, 2010, MSNBC, 2011 and Stoller, 2010). Many customers believe these fees are unfair, perceiving them as increasing profits to firms without offering any value. As a result, consumers have sought to avoid certain fees, for example, airline passengers have been packing more in carry-on bags to avoid checked baggage fees (McCartney, 2008 and McCartney, 2010).
As services have become an increasingly important part of the economy, the significance of understanding service pricing decisions and strategies has grown (Avlonitis and Indounas, 2007 and Docters et al., 2004). However, despite the proliferation in the media, empirical research on the topic of ancillary fees has been sparse. Previous research can be grouped roughly in two categories: (1) general pricing literature that has addressed impacts of price increases ( Homburg et al., 2005), the practice of price partitioning ( Ancarani et al., 2009, Fruchter et al., 2010, Morwitz et al., 1998 and Morwitz et al., 2009), and customer perceptions of price fairness ( Bechwati et al., 2009 and Kimes and Wirtz, 2003) and (2) fee-specific literature, e.g., recreation fee research ( Nyaupane et al., 2009, Reiling et al., 1992 and Williams et al., 1999). For example, Williams et al. (1999) investigate wilderness users' response to new overnight camping fees. They demonstrate that the unacceptability of fees ranged from 2.4% for RV camping to a high of 38.1% for swimming.
Understanding consumers' emotions in response to service unbundling and fee-based pricing practices is of interest both to service management researchers and practitioners. As previous research has shown consumers' brand attitudes decrease after they realize that they misestimated the total of partitioned prices, attributing that error to the provider (Lee and Han, 2002). More importantly, consumers may engage in “anti-branding behavior” (Krishnamurthy and Kucuk, 2009 and Kucuk, 2008) that can lead to significant brand damage. For instance, a proposed monthly fee for ATM usage by Bank of America in 2011 resulted in an online petition that was signed by more than 300,000 customers, threatening to leave the bank (Kim and Gutman, 2011). As companies are moving towards a “portfolio of ancillary fees”, the important question arises which fees cause strong negative emotions, and which fees lead to avoidance behavior or even retaliatory customer behavior.
Given the lack of empirical research in this domain, this paper tries to contribute to the neglected topic by investigating the effects of ancillary fees. This study is the first to investigate the acceptability of a variety of ancillary fees for unbundled services and their effects on customer emotions as well as customer behavior. The model is then tested using data from the airline industry. The contributions of this research are twofold: first, we establish a conceptual model that links fee acceptability of unbundled services with affective responses and customer behavior. Second, we demonstrate that effects vary within a portfolio of ancillary fees, suggesting that fees for certain unbundled services are less acceptable than others, leading to more negative consequences for the firm.
The paper is structured as follows: First, we will review the current literature and discuss the theoretical underpinnings leading to our research model and the derived hypotheses. Then, we will present findings of an empirical study conducted in the airline industry. Finally, we end with a conclusion, managerial implications and a discussion of limitations and directions for future research.
