Congress Could Make “No Hidden Fees” More Than a Credit Card Commercial
While it seems like America can’t agree on practically anything lately, it seems that many agree hotel and short-term rental fees deserve to be put away for good. This week, representatives Eddie Bernice Johnson (D)(TX) and Jeff Fortenberry (R)(NE) introduced the “Hotel Advertising Transparency Act of 2019" to the Congress floor. This bill seeks to make illegal any “rate for a place of short-term lodging that does not include all required fees, excluding taxes and fees imposed by a government."
While consumers in many industries dislike fees, they still exist in many industries for a reason and it seems a bit pointed to target short-term rentals, whether traditional hotel or vacation rental, specifically. There are rental application fees for apartments, a list of fees for required components of a mortgage, baggage fees for airlines, non-optional university fees, and shipping fees for products exclusively sold online. Nobody “loves fees”, yet they persist anyways.
Why are fees used by different businesses? What happens if the bill passes and fees can’t be used anymore? How will lodging providers adapt? For the answers and more keep reading for RevPARTY’s take on the whole situation.
Why do Hotels and Short-term Rentals Use Fees?
Regardless of the industry, non-optional fees are used because they can be. While “no hidden fees” makes a good marketing slogan it also removes a lot of pricing options and retail strategies. If the very concept of fees were so hated by customers than businesses would remove them to gain an advantage over their competitors and slowly the rest of the marketplace would adjust to do the same. In lodging, we don’t see hotels or vacation rentals abolishing fees because the marketplace tolerates it and all of the supply has already struck the equilibrium of using fees.
So why are their fees anyways? Why not be the property that guests love because there are no fees? Well, there are several ways are advantageous to the hospitality industry.
Lower Sticker Price: Even in a vacuum, a lower price is always better to the consumer. If you think about shipping and handling fees from late night infomercials this concept is intuitive. Its better to sell a product for $19.99 + S/H then to sell it for $27.83; even though every item has S/H, the item is unlikely to be comparison shopped, and the net price is the same either way. People like lower prices that are pretty.
Variable Pricing: These sort of fees make more sense to consumers as they’re often tied to specific costs. Maybe the S/H fee from above is more to ship to the west coast than the east coast. The west coast customers are more likely to pay the higher price that they now perceive as fair and the seller will win more business on the east coast with a lower east coast fee than if they applied one average fee to the entire country. This type of fee is often tied to vary tangible things like shipping, electric costs, hours of labor, etc. In the hospitality industry, it helps insulate a business’s bottom line.
Justifies a Higher Price: Similar to variable pricing above, the fees help explain why the price is what it is. Even if those costs aren’t variable fees serve as a justification for a higher price tag. It educates the customer on what they’re receiving and what they’re paying for. Turndown service, added security, high speed internet, bag check; fees help show the benefits the property (or product) provides and is often quicker and cheaper than an educational campaign.
Individualizes Pricing: Fees can sensibly allow easy individualized pricing. Golfers can pay to use the golf course, corporate travelers can pay for business center access, and those who aren’t using those amenities don’t have to pay for them. However, it also allows for easy customer segmentation and price discrimination. A guest in the presidential suite is less likely to balk at a $20 fee than the guest in the budget friendly room. Therefore, you can charge these fees to less price sensitive customers with no negative repercussions as people don’t feel they’re being unfairly targeted or excessively charged.
Shoppers Are Less Critical of Fees than Sticker Price: When guests shop for a place to stay they’re often comparing the nightly rate for their stay or making initial selections based on the “entry price” (or the lowest nightly rate displayed on your properties listing). They’re more likely to favorably compare a $99/night rate to a $120/night rate … even if the former has higher fees. This happens for several reasons. First, fees are pretty standard throughout the industry and so the customer is conditioned to just accept there will be some feed. Second, it’s a lot harder to research and compare all of the different fees out there. Thus, almost every listing includes fees. Lodging providers merely have to avoid offense pricing that draws a negative reaction to their fees rather than win on fees but … they have to win on price. (LINK TO AIRBNB BLOG)
What Happens if the Bill Passes?
If the bill passes it will take some time to implement. Nobody will wakeup to a fee free world tomorrow. After a while, some marketplace changes will begin to happen.
Simply put, to comply with the new legislation property managers will have to change the way your bill appears. This will also be enforced by online travel agencies (OTAs) and will create a much more apples to apples comparison of listings.
The new apples to apples environment will make it easier for potential guests to comparison shop. It also makes it easier for OTAs to enforce parity. With less fees, fenced prices, and the standardization of nightly rate its likely that AirBnB, Vrbo, and other sites focusing on vacation rentals will require pricing parity with hotel websites like Expedia and Booking.com. Systems and distribution will be a role that continues to have increased importance.
How Will Property Managers Adapt?
There are three main possible outcomes that may happen individually or simultaneously across the industry:
The Fees Are Technically “Optional”: The bills could remain the same and the hotel claim the fees are technically optional. Its kind of like going to buy a car at a dealership. Many people pay optional fees (like the mythical clear-coat protection) because its presented as standard. The same could happen for hotels as they present the standard fees guests are accustomed to and bank on guests not noticing the fees, questioning the fees, and avoiding conflict.
The Fees Truly Become Optional: The fees truly become optional and become more of the upgrade and variable pricing fees from above. The industry becomes more of an al a carte service as people pay for daily turndowns, pool access, or high-speed wifi. However, this is unlikely for two reasons. First, this allow customers to really dissect value. They can determine if your pool really justifies a $10 pool fee or if your pool is really $5 better than your competitors. Second, bundling (an extremely common pricing tactic) is extremely effective in the hospitality industry. So much so that OTAs try to bundle flights, hotels, and car rentals. This is likely to be the least effective and least probable path forward. In fact, we see airlines that really focused on a lower entry price and bags as an add-on service during the Great Recession revert back to bundled prices.
The Fees Get Baked into the Nightly Rate: Especially in instances where cost and pricing isn’t variable, the fee will likely get baked into the nightly rate. In the long-run, hotels and vacation rentals will work these fees back into their price to help sustain their margins and insulate their bottom line. This will be a slow process as the market corrects to the new PnLs and because the first-mover (the first property to raise their nightly rate) will likely face negative consequences from having a higher sticker price while price perceptions remain sticky.
So What Happens Now?
The bill is unlikely to pass as it already failed previously in 2016. It also opens up a completely new array of fee problems in other industries that Congress is unlikely to tackle. Before any of this can happen, the bill will have to pass through committee first.
If the consumer really feels as the bill does that “advertising that does not reflect the true mandatory cost of a stay at a place of short term lodging is deceptive”, then I think most property managers want to make guests happy. However, its difficult to do in the current environment where everyone charges fees and no one wants to be the first mover. If so, this bill fills the role government should play in the economy, coordinating individual actors for public good.
If your business needs help navigating the evolving complexity of the fees landscape, RevPARTY is here to help. We’ve helped multiple clients optimize their fees to achieve the best results possible with every listing.