Tuesday, August 30, 2011

Tips for introducing a service fee

Debating whether you should introduce a fee of some kind to cover a service you provide? There are obvious financial advantages to your bottom line, but is it worth the negative reaction you may get from customers? Here are three behavioural principles that will help you consider your options.

Social contract
Charging for something shifts it from social to commercial transaction, and this means that the service will be viewed differently. In a case study profiled in “Predictably Irrational” by Dan Ariely, a childcare center imposed a fee on parents who were late in collecting their child. Sounds like a sensible idea, motivating those parents prone to tardiness to make more of an effort to get there on time.  But what happened? Tardiness became worse!  Why? Parents felt less guilty about being late because they were now “paying” for it.  The arrangement had shifted from a social to financial transaction, and expectations shifted in kind.  In your business, take note of how social norms are influencing the behaviour of your customers before you shift it to entitlement territory.

We adapt to something faster if we are not interrupted and reminded about it (think ‘quick like a Bandaid’).  By introducing a service fee you will be drawing attention to that service every time you charge for it.   If it’s great service, it can be a good move to charge every time so that you can showcase the value and prevent customers taking it for granted (adapting to it). But if your service is not that hot or not easily understood, better the charge is either infrequent (like annual) or deemphasised (don’t provide long-winded explanations on every bill) so that customers have a chance to forget about it after initially being annoyed. 

Loss aversion
The power of fees is often in what you do not charge.  “We’ll waive normal joining fees” or “We’ve scrapped fees” are popular techniques amongst banks and gyms because they placate our aversion to loss – we feel like winners because we’ve avoided the pain of a fee.  For the reason alone of customer motivation it is worth having some sort of fee that you can waive as you need.

From your own experience as a consumer it should come as no surprise that service fees are often resented.  The opportunity for your business is to know how and why you can use fees to influence customer outcomes and overcome potential resentment, and to proceed knowing that it’s not as simple as cost recovery.  Until next time, happy charging.

This article also appeared in Smartcompany.com.

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