MONEY OBEDIENCE

We save money. Shoppers are catching on.

In “How to find cheap airline tickets” we talk about how we save money when we book an airline ticket. We also complained a little bit. It almost seems like it’s the goal of airlines to lose us in the jungle of prices and policies, because we are totally lost when we try to understand how they price airline tickets. But there’s a good reason for that – pricing is not totally clear, and one reason is a behavioral finance concept called “price frames.”

This is how frames work. One frame lets you know the final price right away, another one, much later in the purchasing process, tells you about fees, monthly subscriptions and things like that. Most times when you’re buying airline tickets, you get two different price frames before you learn how much you’re actually going to spend to buy that seat on that plane.

Here are two common ways frames are presented to a consumer. You’ve run across these, haven’t you? “Drip pricing” at first gives you only part of the price, and then, as you proceed with your purchase, you get to find out the final price. For instance, I once saw a flight to Europe that look like it cost only $320 before I found out that I had to add to that price $400 in taxes. These days you also have to consider factoring in extra fees for luggage. Another frame is the “Limited Time offers” that tell you that you must hurry up to book that flight at that price, because “only 4 tickets are left today.” After today, you should expect a price increase.

A recent study conducted by the UK’s Office of Fair Trade tested these frames and a few others. They found out that we make mistakes when we face such price frames. Here’s one example: we usually don’t shop around enough when faced with “drip pricing,” so we accept the additions to the price as we proceed with our purchase as if these additions were inevitable. (Read our post “How to find cheap airline tickets” to avoid getting suckered in by this one.)

The worst thing about these price frames is that nobody wins in this game. We already know that we tend to overpay with the airline tickets offered at “drip prices.” But it doesn’t look like the airlines gain that much – remember how many recent airline industry bankruptcies we’ve seen? It seems to me that their pricing strategies aren’t doing a whole lot to make for a healthy industry. You would imagine that they abandon the practice at some point, but I would not hold my breath. I put my money instead that they spend a lot of time thinking up something even more complicated than “drip pricing.”

Okay, here’s the good news. The experiments presented in this research paper also show that shoppers catch on to different pricing strategies. It may not happen right away, but they start adjusting their shopping behavior. Yep, it’s just like my wife and I – we have our own air travel buying strategy. “Fool me once, shame on you, fool me twice, shame on me.” I don’t want to be shamed. Would you?

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