Bait-and-surcharge pricing, marketing an attractive price to gain consumer interest and adding mandatory fees at the time of purchase, is becoming the norm in many industries. In this article, the author explores this tactic and why it is unethical, but also why it is difficult for companies to abandon due to the effects it has on market competition and customer perception. Rafi Mohammed is the founder of Culture of Profit LLC, and author of The 1% Windfall: How Successful Companies Use Profit to Profit and Grow. He can be reached at rafi@cultureofprofit.com. This article originally appeared on the Harvard Business Review (HBR.org).

The Pricing Advisor, March 2019

In the classic shell game of three-card Monte, marks are rewarded if they are able to identify the “money card” among three face-down cards that are being shuffled. In this sleight-of-hand scam, the mark is never able to choose the right card.

An increasing number of businesses are playing a version of three-card Monte with how they set their prices. “Bait-and-surcharge” involves marketing an attractive price to gain consumer interest. However, when it comes time to purchase, mandatory surcharges are tacked on. Through this sleight-of-hand, the advertised price is never the final price. This is an unethical business practice.

Bait-and-surcharge pricing is becoming the norm in many industries. Ever try to book a hotel room in a resort area? Don’t forget the hidden fees. A $25 advertised room rate at the Circus Circus hotel in Las Vegas appears to be a bargain. However, click to purchase and you are hit with an additional $36.28 nightly resort fee. An advertised $49.50 ticket price to attend a Billy Joel concert in Phoenix comes tethered with a 50% premium slapped on at checkout for service, facility, and ordering fees. Sprint has decided to add an inescapable “administrative charge” to its advertised prices, which for me adds another $5 to my monthly bill.

An emerging trend at restaurants is to have a footnoted asterisk at the bottom of menus levying an unavoidable 3% “kitchen appreciation” fee. This fee is typically accompanied with verbiage indicating that the surcharge is dedicated to providing a living wage to kitchen staff. To avoid infringing on servers, restaurants make it clear that this line item charge is not the tip. This is a sketchy practice. I’m all in favor of paying the kitchen staff living wages, but restaurants should muster the courage to be transparent and simply raise their menu prices.

Why do businesses employ bait-and-surcharge pricing? Let’s be clear: this is a blatantly deceptive tactic designed to mask the real price. This practice also makes price comparisons challenging, which restricts competition. It’s inefficient for travelers to evaluate a listing of hotel prices on online travel sites. Each hotel’s net price is revealed only after clicking additional pages to calculate its unique resort fee.

Even though customers chafe over bait-and-surcharge practices, it’s often challenging for companies to ditch the practice. Many are stuck in what I call a resort fee prisoner’s dilemma. Trying to do the right thing – being transparent and better serving customers – puts a company at a competitive disadvantage. Loading all of the mandatory fees into an advertised price makes it look expensive relative to competitors that opt to sock it to customers later in the purchasing process.

In response to customers’ frustrations over additional service fees, the ticket reseller StubHub started listing “all-in” prices on its site in 2014. Company executives thought that competitors would follow their lead to make prices more transparent. They didn’t, and StubHub’s market share declined significantly. A year and a half later, the ticket reseller tested different pricing strategies with customers. Some saw an all-in price while others were offered a low price with surcharges added at checkout. Within the first hour of testing, it became clear that the low-list-price option generated higher revenue. To remain competitive, StubHub reverted back to bait-and-surcharge pricing (though users can opt to have all-in prices presented).

Sometimes companies try to justify their bait-and-surcharge practices by pointing out that airlines charge extra fees. This comparison is erroneous: unlike resort fees, extra airline charges are not mandatory. Strictly for convenience reasons, I avoid additional charges by travelling with carry-on luggage and booking via the web. Even auto advertisements that offer “as low as” prices theoretically allow customers to pay the marketed price if they meet all of the requirements. What negatively distinguishes bait and surcharge is the additional fees are unavoidable.

There’s a fine line between overprotecting consumers and holding them responsible for the due diligence required by our caveat emptor economy. For free markets to prosper, good information is needed on products and prices. There’s no redeeming value to bait-and-surcharge pricing – its key intent is to mislead which restrains competition. For companies trapped in a resort fee prisoner’s dilemma, there’s little incentive to fight the trend and be more price transparent. The remedy is straightforward: companies should be upfront with their all-in prices.

It’s time that laws are enacted to stop consumers from being marks of this pricing shell game.