Supershopping Leads to "Penalty" Pricing and Bad Business

We live in the era of the supershopper.  The supershopper is consumer with a distinct buying style such that they constantly and endlessly seek out the most product information and the lowest price often making an effort beyond any rational return on investment for their time and effort.  This is a shopping behavior that has always been present but, now with the full search power and convenience of the Internet, it is easier and easier to be a supershopper.  This behavior is most evident in consumer buying practices but is also present in business to business buying practices.

How do supershoppers operate?  Supershoppers may drive BMWs but will drive across town to save a few cents per gallon on gas.  Supershoppers are rarely supershoppers in every aspect of their lives.  They may wear designer clothes purchased from a high-end boutique but will also spend an hour on various travel sites on the internet looking to save a few dollars on a flight across various travel sites.

Merchants/vendors have responded to supershoppers by changing the way the rules are played.  No longer do merchants/vendors make their money on the price for the primary products or service, they make their money in hidden little ways.  What do I mean by this?

They make their money through extra fees.  For example:

• Airlines compete on fare prices (the primary service) but look for every opportunity to up-charge consumers for baggage, overweight baggage, beverages and snacks, ear phones, reservation and ticketing changes, and fees for curbside check-in (peripheral services).
• Consumer electronics companies do little more than break even on product sales and make their money on selling service contracts, interconnect cables and accessories.
• Online retailers make their money on shipping and handling fees that bear little resemblance to the actual costs associated with shipping and handling.  They have to keep their prices unreasonably low to win the search engine price wars.
• Banks compete on "no fee" checking but hit you on every fee under the sun.
• Car dealers make their money on dealer options, financing, service, trade ins and service contracts and will sell cars below invoice.
• Ink jet printers are priced below cost but the ink refills are very profitable (the Gillette razor business model).
• Cell phone companies make money on those who use significantly less than their contracts call for or those who run over their contracts or, heaven forbid, those who use their phones while overseas.

The list goes on.  In the business to business world, there examples like this:

• Building contractors who underbid on a contract but push for change orders at full rate for every little deviation in the design.
• Service providers who compete by dropping their labor rate by using illegal labor or not having the required insurance they claim to have and hope for the best if there is a liability claim or investigation.
• Hidden expenses and kickbacks to vendors on all sorts of deals from off-bid subcontractors.
• Fees that rise with the rise in price of certain commodities but don't come down unless the customer is diligent about demanding it.
• Eliminating post-sale and pre-sale customer service.
• Service providers doing substandard service and promising warranties that they know they are unlikely to be able to actually deliver on.

The question, of course, is whether these buyers are really saving any money or just deluding themselves.  There are those very rare buyers who can successfully navigate the waters of the fees and hidden costs and manage to keep their total costs low in these situations but those people are the minority. The irony, of course, is that the merchants and vendors that are most honest and upfront with their pricing based on a real cost structure and lean but reasonable profit margin often lose the deals to those using this penalty pricing model--that is a pricing model predicated on finding ways to cost the customer more when then least expect it.  The buyer loses and the honest vendor and merchants lose.

So, the question is this:  What is an honest vendor or merchant to do in a market like this?  I think there are only two real strategies:  The first possible strategy is to join the fray and be a bandit like your competitors.  Clearly, this is the strategy that most airlines and banks are taking as they cut services and increase fees to follow the likes of Spirit Air and Citibank.  

The second strategy is to educate, or attempt to educate, and market to prospective clients about the total fees involved and the value of the services provided to convince them.  It is vital that prospective clients understand what the cut rate vendors are really costing them.  The bad news about this strategy is that it requires mental investment on the part of consumer and some won't be willing to invest the energy into learning and possibly changing their behavior.  Additionally, as long as the consumer hope holds out hope that they can be one of that minority that actually saves money in the penalty pricing model, they are going to be difficult to convince.