If a Junk Fee is Disclosed, Does it Become Less Junky?
A case study of how hotels are astutely dealing with highly profitable but extremely unpopular and politically targeted resort fees raises the question, "Is consumer welfare really being served?"
"Without realizing it, folks can end up paying as much as 20% more because of hidden junk fees than they would have paid if they could see the full price up front and compare it with other options. It's wrong. It’s about fairness. Folks are tired of being taken advantage of, being played for suckers.” – President Biden, October 2023.
If you are a pricing strategist or consultant, this President Biden quote from when he was providing an update on his administration’s efforts to combat junk fees late last month is worth dissecting closely. Junk fees have been in the regulatory crosshairs for a while now, and the pressure is ramping up. A couple of weeks ago, President Biden announced a number of actions that his administration is taking to “protect consumers from billions in junk fees.”
Defining junk fees as “hidden, surprise fees that companies sneak onto customer bills, increasing costs and stifling competition in industries across the economy,” these actions will span various pricing issues, from showing the full room rate for hotels to requiring banks and credit unions to provide basic information like loan payoff amounts and checking balances to their customers without a charge.
While there are a number of interesting issues from these recent announcements to unpack, particularly for financial services and airline pricing, in this post, I want to focus specifically on hotel resort fees and consider exactly what the Biden administration’s stance on junk fees means for hotels and for consumer welfare.
Specifically, I argue these new executive actions do not go far enough or solve the problem of hotel customers overpaying and making bad booking decisions because of junk fees. I will explore how the major US hotel chains have responded proactively to this adverse attention in ways that skirt the core problem for consumers and mostly maintain the high-margin revenue stream. The reaction of hotel chains reflects a textbook case of an effective pricing strategy involving proactive and visible response that is limited in its effects and retains profit. The current framing of the junk fee problem by politicians and regulators and the just-enough response by hotel chains do not serve hotel customers’ welfare sufficiently.
A Quick Overview of Resort Fees
Back in the 1990s, some creative manager of a Hawaiian resort adopted the concept of a bundled fee to package all the amenities they were offering into a single price that was tacked on to the daily room rate. The idea first spread to other resorts in Hawaii, then beyond to other resorts and regular hotels. What started as an optional bundled daily fee for the resort’s distinctive, valued, and regularly consumed amenities delivering significant customer value quickly turned into a mandatory fee that every guest had to pay whether or not they used the amenities and whether or not it made sense to charge daily fees for things that were offered once like a welcome drink. The amenities provided in exchange for the fee also became more pedestrian; things like wi-fi and in-room coffee are included in the room rate by most hotels, but some decided to charge a so-called resort fee for them, even though there was nothing resort-like about the hotels or the amenities.
Since many of the hotels imposing resort fees couldn’t be deemed as resorts by any stretch of the imagination, the name for the fee also morphed into destination fee, amenity fee, urban destination fee, facility fee, and so on. By January 2023, the average resort fee (for hotels charging these fees) was $42.4. Today, resort fees are defined by the industry as, “mandatory fees charged at either a flat amount or a percentage of the room rate,” and are charged by about 6 percent of US hotels (as of 2018), many of them premier chain properties located in top-tier destinations like New York City, Las Vegas, and Hawaii.
Hoteliers like resort fees for obvious reasons. In 2018, resort fees increased the average daily rate (ADR) from $232 to $246, providing a 6% boost. While these fees constitute only about 3% of the aggregate revenue for hotel chains, they are extremely profitable because they have very little associated incremental cost. For an average hotel chain, the revenue from resort fees would easily boost company-wide profit by about 10-11%. The boost would be even greater for poorly run hotels with lower margins.
Furthermore, levying resort fees on all customers and then waiving them for some (e.g., certain tiers of rewards program members) is a way to price discriminate effectively and reward relational customer behavior. Thus, it makes sense for hotel chains to impose resort fees at as many of their more desirable and popular properties as they can. Finally, resort fees are a classic example of the zero-sum game aspect that underlies much of pricing strategy where the seller has to hurt the customer’s pocketbook exploitatively to boost its profit, and the degree of harm corresponds proportionally to the profit boost.
The Aversive Aspects of Resort Fees
Resort fees are despised by customers for three reasons: (1) they are mandatory, (2) they are charged at a daily rate even when the underlying amenities provided are not consumed daily (or at all), and (3) they are dripped on to the consumer during the booking process, and in this sense, they are hidden.
As President Biden’s quote at the top of this post shows, it is only the third reason, the hidden, surprise drip pricing aspect of resort fees, that’s being targeted by his administration’s actions. It’s, therefore, worth understanding what drip pricing exactly means and how it affects consumer welfare adversely. Here’s how Rasch, Thöne and Wenzel (2020) explain drip pricing:
“Under drip pricing, the product price consists of several components, but firms advertise only one, single part (the bait price) of a product’s overall price when consumers first learn about the product. The other price components (drip prices) are only revealed at later stages of the purchasing process. Because going back to search for alternatives may be costly, this can lead to a lock-in of consumers. Under drip pricing, consumers may therefore underestimate the total price, and search too little to find the best deal.”
This makes sense. The price hotel customers see is the nightly room rate on the first booking screen. Resort fees, taxes, and other charges, such as parking, appear later when the customer is closer to booking the room, often after creating a profile and providing personal and payment information. Thus, the customer (1) is initially misled into thinking they are going to pay a lower price than what they actually pay, and (2) they don’t know the price they are really going to pay until much later in the booking process when they’ve already expended effort and raised commitment to the hotel room. It’s a lite version of how American hospitals treat their customers.
Drip pricing is the main reason behind a number of recent class-action lawsuits faced by hotel chains like Hyatt, Sonesta, and Marriott from consumer welfare groups, all of which argue that the lack of upfront disclosure of the resort fee (or whatever the chain calls the fee) misleads the consumer. For instance, in the class action lawsuit against Sonesta, the plaintiffs used the example of a particular booking process at the Royal Sonesta Washington DC Dupont Circle website (which is still exactly as detailed in the lawsuit at the time of this writing), where the consumer is first presented with room choices at lower advertised prices (e.g., an executive studio for $285 per night), as shown below.
Then, after the customer has provided their personal information and is about to book the room, they will see the actual price they’d have to pay of $365.25. Even here, they’d have to actively click on “Expand Price Details” to learn that the total price includes an occupancy-based tax of $45.46 and a resort fee (called destination fee) of $34.79 ($30/night plus tax) as shown below.
Thus, the timing of price disclosure, not the price itself or the reasoning behind it, has been framed as the core issue. In this lawsuit and others, the alleged harm to consumers is seen as occurring not from the mandatory daily fee they are forced to pay for amenities that may be irrelevant to them but from not knowing the charge exists at the beginning of their booking process. This is how Skift’s Sean O’Neill puts it:
Disclosing fees is important. When they are disclosed is important as well. Do it at the end of the process, and the buyer may be surprised by the true cost. A delay prevents a traveler from easy comparison shopping.
The academic research on drip pricing is consistent with this perspective, giving all its attention to the disclosure’s timing and its consequences rather than its mandatory, consumer value-eroding nature. Its main point is that when disclosure is delayed, consumers are locked in, and their switching costs increase enough that they become more amenable to saying yes to the hotel room and end up paying a higher price than they thought they were going to pay.
Responding to the way this problem has been framed, many of the major hotel chains have been proactive in partially addressing it. Briefly, here’s how three of the major chains, Hyatt, Marriott, and Hilton, have dealt with the drip pricing aspect of resort fees so far.
Hyatt’s Approach
Hyatt has chosen to keep the resort fees (called “destination fees”) on its properties which had them, but now discloses them clearly to potential customers by showing a price inclusive of resort fees at the first step of the booking process. The company’s explanation is as follows:
“After careful consideration, we made the decision to move to what we call an all-in rate display for hotels in the Americas. As of July, the most prominent rate shown throughout the booking process on Hyatt channels for properties in the Americas now includes both the room rate and any resort or destination fees. This rate does not include taxes. We did this in an effort to further enhance disclosures to our guests, in line with Hyatt’s purpose of care.”
If you want to rent a basic room with a king bed at its Grayson Hotel in New York City for November 2, for instance, its $30 destination fee per room per night and its total nightly room price, including destination fee, are both prominently displayed to consumers up front along with a destination fee warning (see below).
Further, it is easy to find out what amenities you will receive for the destination fee, although, as shown in the image below, most of the amenities covered by the fee are things like Wi-fi, fitness center access, and in-room self-serve coffee and tea that most hotels, including many Hyatt properties, provide without such a fee.
Such a disclosure doesn’t extend to Hyatt’s properties on OTAs. On Expedia, the same Grayson Hotel room for the same booking period has a $30 lower-quoted room rate, a higher destination fee ($35 instead of $30), and a “total amount” disclosure on the first room selection screen. The customer won’t know how much the destination fee is, but they will know their total bill if they book the room on Expedia. This is presumably to earn a more favorable ranking in hotel searches on Expedia.
Marriott’s approach
Marriott’s approach is identical to Hyatt, in disclosing and including the $30 destination fee on the first booking screen and not including it on OTAs, where the customer would have to click on the price details to learn about the destination fee. Both prices in the figures below are for a deluxe room with 2 doubles for the night of November 2.
Hilton’s approach
Hilton’s approach is slightly different. On its own site, the hotel brand provides a room rate without the resort fee but clearly states the amount on the first booking screen. Additionally, to the chain’s credit it also details the resort fee’s benefits right there. In addition to Wi-Fi, the resort fee is essentially a $35 daily forced payment for food and drink purchases on the property (with lost value if the customer doesn’t make those purchases). Hilton’s approach to OTAs is identical to the other two chains, except the resort fee is $40 on the OTA site instead of the $35 on the Hilton site. The figures below show the prices for a basic room with a king bed for Nov 2.
Variations in Drip Pricing Disclosure
From these cases, it is clear that all three chains have adopted a comparable “just-enough” corrective approach to assuage complaints of drip pricing raised by customers, politicians, and regulators about resort fee disclosure. These companies have chosen to disclose the amount of the resort fee (or equivalent) on the first booking screen on their own respective sites, either adding it to the room rate (Hyatt, Marriott) or letting customers do the math (Hilton). None of the three hotels have chosen to disclose or include the resort fee with the room rate on the first booking screen on Expedia.
The logic behind this different handling of disclosures on their own sites vs. the OTA site is fairly straightforward. On one’s own site, the hotel room (and the property as a whole) competes with its siblings (other rooms on the property or other hotel brand properties in geographical proximity that may vary significantly in quality and price). It is a friendly competition between siblings. In contrast, the room and the property compete with numerous other rival brands on the OTA site that may not charge resort fees. Here, adding the resort fee to the room rate will inflate the price and lower its placement in potential customers’ search results on the OTA site and a lower likelihood of being chosen, and doesn’t make sense even if it misleads potential customers. The competition for OTA customer eyeballs and wallets is anything but friendly sibling rivalry.
What About The Other, More Pernicious Consumer Welfare-Eroding Aspects Of Resort Fees?
As I’ve pointed out a couple of times earlier in this post, virtually all of the regulatory and legal attention, not to mention the consumer outrage about resort fees, has focused on the timing of the disclosure during the customer’s booking process. Their other two aversive and value-eroding aspects — the fact that they are mandatory and that they are charges for amenities that may not be consumed or valued by a majority of customers, have escaped attention.
No matter when they are disclosed, resort fees are purely profit-enhancing surcharges whose only goal is to raise high-margin, low customer-value revenue. They capitalize on the fact that when prices are partitioned, consumers tend to underestimate the total price and come away with an impression of a price that is lower than what it really is. Furthermore, hotel properties with distinguishing characteristics (a popular location like New York City, an upscale image, an established reputation, high occupancy, etc.) charge these fees to capitalize on their pricing power. They mostly neglect customer value.
As Lauren Wolfe, the founder of Kill Resort Fees puts it:
“Unlike the unbundled fees airlines charge that you can opt out of and fly in a seat, hotel resort fees can’t be opted out of, which is why we say their purpose is deceptive pricing.”
This mandatory and forced payment for unvalued features and benefits contained in resort fees demands attention. Consumers, politicians, and regulators should be outraged not just by the fact that we see those surcharges after we’ve chosen a hotel room but by the fact they are there at all.