The following is a guide to drip pricing laws in Canada including the definition, applicable penalties, real life examples of the technique used by companies that were penalized by the Competition Bureau and where you can report the the illegal, yet still popular pricing practice.
What is drip pricing?
According to the Competition Bureau, drip pricing is the offer of a product or service at a price that is unattainable because consumers must pay additional non-government-imposed charges or fees to buy it.
It is when a company advertises a lower price to a consumer initially, then revealing (or “dripping”) additional, unavoidable fees onto the price as they go through the buying process, disclosing the real, higher full price until later in the buying process.
For example, a website, online ad, or e-mail promotion shows you a price so good that you to click the link, add the product or service to your cart or begin the purchasing process. You make a couple of selections on one page, fill out your personal information on the next page, you click next and then suddenly the price shown is higher – additional, mandatory fees have been revealed now that you’re deeper in the checkout process, causing the final price to be higher than initially advertised.
The additional fees may also be named or presented in a way that implies that they are mandatory taxes or surcharges imposed by other authorities such as governments in the hopes that you simply accept them as mandatory and unavoidable, when, in fact, the company chose to impose the additional mandatory fees to increase their profits.
Drip pricing laws in Canada
In Canada, the law explicitly states that drip pricing is false or misleading which is prohibited by Section 52 of the Competition Act unless the additional fixed charges or fees are required by the government, such as a sales tax.
To avoid breaking the law, companies must provide full price disclosure to the customer – including any additional fees – clearly and up front before they start the purchasing process.
What are the effects of drip pricing?
Consumers pay more for goods and services
Studies show that it systematically makes consumers pay more for goods and services than they would under a more transparent pricing system – to the benefit of the seller.
A study conducted by StubHub found that consumers who were subject to drip pricing on its website spent 19.52% more than consumers who were shown the full price upfront. An experiment by Huck and Wallace (2015) found that drip pricing reduced consumer surplus by 22%.
These are large harms to individual consumers, but also in the aggregate add up to very large monetary harm.
Increased decision making time
Drip pricing forces consumers to spend more of their time on a purchasing decision by making it more difficult for them to comparison shop. The consumer must spend additional time searching for full pricing information to engage in
comparison shopping, or must make an uninformed decision.
Given the prevalence of drip pricing, consumers’ aggregated search times add up to substantial harm.
Reduced market competition
It undermines market competition by making it seems like their product or service is cheaper than the competition, making it difficult for businesses with more transparent pricing to compete on a level playing field by restricting competitive forces to the base price only, with minimal competition influence on additional charges.
Competition is hindered when consumers cannot get the information necessary to make informed choices.
Drip pricing penalties
As per of Section 74.1 of the Competition Act a company engaging in false or misleading representations can be ordered to pay a fine and as of June 23, 2023 the maximum Administrative Monetary Penalties (AMPs) for deceptive marketing practices such as drip pricing will be increased considerably.
For individuals (previous maximum of $750,000)
The greater of:
- $750,000 (and $1M for each subsequent violation), and
- three times the value of the benefit derived from the deceptive conduct, if that amount can be reasonably determined
For corporations (previous maximum $10M)
The greater of:
- $10M (and $15M for each subsequent violation), and
- three times the value of the benefit derived from the deceptive conduct, or, if that amount cannot be reasonably determined, 3% of the corporation’s annual worldwide gross revenues; and
This is a huge change and has the potential to help resolve the common refrain and complaint of victims and consumers alike:
Financial penalties and fines applied to corporations caught breaking the law only ever amount to a small portion of the profits gained – a “slap on the wrist”- and are often treated as a “cost of doing business” by the companies penalized (fines and penalties are not literally tax deductible in Canada).
The fines don’t act as a deterrent if a company can make considerably more in profits than the amount of the fine by not obeying the law – particularly if the corporation doesn’t have to plead guilty, and the individual executives are shielded from legal liability.
Only time will tell if the Competition Bureau will actually apply these considerably higher penalty ceilings in practice.
Drip pricing examples
The most well-known offender is the travel industry. Airlines add baggage and seat selection fees. Hotels drop resort fees at the last minute and Airbnb listings carry cleaning fees, service fees and taxes. Other industries include:
- Hotels (resort fee)
- Event ticketing (service, processing, delivery, instant download fees)
- New cars (documentation, floor plan, preparation, advertising, destination, delivery or processing fees)
The following are past cases of drip pricing in which the Competition Bureau has applied financial penalties:
Car rentals: Enterprise Rent-A-Car
In February 2018 Enterprise Rent-A-Car Canada received a penalty of $1 million and correct what the Bureau deemed misleading advertisements. The prices were not available to Canadian consumers due to additional mandatory fees which increased the advertised prices by 6% to 48%.
The Bureau has taken action 3 times to resolve similar concerns in the car rental industry and laid a total of $5.25 million in monetary penalties against the 3 largest car rental companies in Canada – Avis and Budget in June 2016 and Hertz and Dollar Thrifty in April 2017 and Discount in October 2018.
Other examples can be found in the deceptive marketing practices cases.
In February 2021 FlightHub received a $5 million penalty for charging customers hidden fees, authoring positive customer reviews to promote its services, and making numerous false or misleading claims about its prices and other flight-booking services.
Specific to drip pricing, they increased prices after consumers selected a flight.
Event tickets: Ticketmaster & StubHub
In February 2020, StubHub received a $1.3 million penalty after it was found that they advertised tickets at unattainable prices on its websites, mobile apps and in promotional emails.
Consumers had to turn on an optional filter to include fees in the prices shown, otherwise the fees were revealed at a later stage of the purchasing process and in some cases, customers were still asked to pay more than the prices shown even when the filter was on.
In June 2019, Ticketmaster received a $4 million penalty plus $500,000 for investigation costs after it was found that they added mandatory fees during the later stages of the purchasing process – even though they were even disclosed before consumers completed their transaction – which added 20% to 65%+ to the advertised price.
As part of a $6 million class action lawsuit and a separate $3 million class action in Quebec, Airbnb was found guilty of “double ticketing” by charging more than the advertised cost for a property due to added service fees, which increased the nightly cost from $108 to $122 – which could also be described as drip pricing because fees for non-optional services were added to an advertised price. The settlement applied to Airbnb customers who booked between Oct. 31, 2015, and June 25, 2019 for non-business purposes.
Double ticketing is another deceptive marketing practice that occurs when a business puts two prices on a product and charges the customer the higher of the two. The two prices must be on the product, accompanying the product, or on an in-store or other point of purchase display or advertisement – ads outside of stores or point of purchase such as newspaper ads do not count.
It most commonly applies to retail stores’, but the judge ruled in this case that laws around double ticketing should also cover the online world. If the same case were filed today, it would likely reference the drip pricing clause rather than double ticketing.
While the full price, including cleaning fee, service fee and taxes is now displayed on Airbnb.ca’s listings pages for easier comparison, there still seems to be some form of drip pricing going on:
Searching for a place to stay in Montreal for March 2023 while logged out of my account and before accepting cookies, I found that between the total cost shown on the listings page to the individual listing profiles, the service fee jumped 1.84% with no explanation:
The other 3 accommodations shown on the listings page also had a similar margin:
- 30509809 – $715 increased to $727 ($12/1.68% difference)
- 31529726 – $1,513 increased to $1,540 ($27/1.78% difference)
- 46796000 – $1,067 increased to $1,084 ($17/1.59% difference)
I double checked a couple of Airbnbs in Huntsville and sure engough, the discrepancy is in Ontario too:
- 52950912 – $2,077 increased to $2,110 ($33/1.59% difference)
- 46680996 – $2,073 increased to $2,105 ($32/1.54% difference)
- 495172 – $1,911 stayed the same at $1,911 ($17/1.59% difference)
- 39017671 – $3,051 increased to $3,095 ($44/1.44% difference)
There could be a reasonable explanation for the discrepancy, but I was unable to find one.
Why do companies use drip pricing?
Failing to disclose the full cost of products upfront is likely too profitable to stop, the penalties received are too low, or both.
How does drip pricing work?
Many consumers rely heavily on advertised prices when deciding whether or not to buy a product or service. It is a top criteria on price comparison sites such as Kayak.com for travel, IsThereAnyDeal for PC games and Google Shopping for products, so it’s in sellers’ best interests to offer the lowest price in order to generate the most interest.
The objective of drip pricing is to grab a consumer’s attention by promoting a misleadingly low headline price, enticing them click and venture further into the sales funnel and only disclose the true, higher final price once they have invested enough time and effort in the process and made a mental commitment to the purchase.
This technique exploits cognitive biases consumers have when making purchasing decisions and both empirical studies and theoretical models suggest that mandatory hidden fees cause, or even trick, people into paying more for goods and services – a decision they would not otherwise have made if they had been given all information upfront.
In addition, there are several theories as to the psychological effects on consumers’ purchasing decisions:
Anchoring and adjustment
“It’s just a little bit more…”
Buyers get attached, or anchored to the initial base price and don’t fully adjust to the new, full price – underestimating the total amount charged.
Consumers mentally compare the increases to the initial price, rather than comparing the new total to the full price of alternatives. This makes the fees seem relatively small – only a little bit more than what they’ve already internally committed to paying.
People are more likely to buy something that appears to cost $80 with $20 added later, than something that is priced at $100 up front.
Endowment effect and loss aversion
“I’m just a click away – it’s basically already mine…”
The endowment effect is an emotional bias that causes humans to value what they own higher than its actual market value.
When consumers start the purchasing process, they may picture themselves using the item, the fun they’ll have, the problems they’ll solve, etc. and develop a psychological attachment to it – making them feel as if they already own the good.
After this shift in their reference point, not completing the transaction is perceived as a loss and therefore be willing to pay a higher price in order to avoid that loss.
This is due in part to human’s loss aversion – that once a person owns an item, forgoing it feels like a loss and losing is psychologically more powerful as the pleasure of gaining.
Sunk cost fallacy
“But I’ve already filled out all of these forms…”
It’s a hassle to abandon a booking and start over. You just want to finish the reservation and be done with it.
The sunk cost fallacy is the tendency for humans to continue an endeavor because they have already invested time, money or effort and do not want that investment to be “wasted”, even though the “sunk costs” cannot be recovered.
Drip pricing increases the time and effort consumers are required to invest into making purchase. The time spent filling in personal information and making selections cannot be recovered.
The rational thing to do would be to find the better and cheaper option and start the process over, but because the customer has already spent all that time and made his decision, the customer’s commitment escalates and they irrationally buy the less desired option.
It is a version of the foot-in-the-door technique, a well-researched and successful tactic for getting people to comply with a larger request by having them agree to smaller requests first. If a smaller request is granted, the person who is agreeing feels like they are obligated to keep agreeing to larger requests to stay consistent with the original decision of agreeing.
Lastly, it works when consumers don’t complain about it. The digital economy is huge with thousands of online providers and consumers themselves are the only ones who can effectively monitor the system at scale.
These biases are so strong that studies say that the average consumer cannot be expected to avoid the harms caused by drip pricing as even those with experience navigating drip-pricing schemes end up spending more under them.
Sellers often pair this technique with scarcity or urgency techniques such as countdown clocks, cart timers, and low stock warnings like “Only three rooms left for your dates.” to motivate consumers to buy right then and there.
How (and why) to report drip pricing
False and misleading advertisements and prices are easier than ever to implement in the digital economy. Ecommerce is a huge ecosystem – there are over 98,000 Shopify stores in Canada alone and adding features such as dynamic pricing to your store are only a click away.
Over $12 billion was spent on online advertising in Canada in 2021 and online ad platforms Facebook, Google and Amazon are not in the business of verifying advertiser claims – they’re in the business of selling ads – and the legal liability rests on the advertiser, anyway.
The Competition Bureau has had some success in applying penalties for drip pricing, but with only 242 employees – they are unable to monitor the economy at scale and instead rely on complaint reports from consumers to identify instances:
“information brought to our attention by consumers, businesses and other market participants is very important as it contributes to the identification and analysis of potentially anti-competitive practices in the marketplace.”
This is where you come in. You can help combat misleading and deceptive marketing practices by:
- Voting with your wallet by abandoning a booking when you see drip pricing
- Reporting it to the Competition Bureau in their online complaint form or by calling 1-800-348-5358
- Sending us a tip about it as well so we can add it to this page
I encourage all Canadians to report pricing techniques that they suspect or feel are deceptive – even after you’ve made a purchase – because if you were a victim of it, you likely aren’t the only one.
Are shipping fees drip pricing?
In my opinion, based on the Competition Bureau’s definition, shipping fees could be classified as drip pricing depending on how and when they are calculated and presented to the customer.
If they are only calculated and presented to the customer during the checkout process – after products have been assessed and added to cart – then it seems as though the initial price would be certainly unattainable because consumers must pay for shipping to obtain the item and the fee is certainly not required or mandated by the government.
While mandatory, shipping fees would likely not count as misleading as online purchases are generally understood to require additional fees to have items delivered, there is still the question of how deep into the checkout process the fee is calculated.
While Google Shopping isn’t selling products directly, unlike almost every online retailer they display both the price and shipping fee in the listings pages:
If this information exists and is accessible to Google, why can’t retailers do the same on their category/listings pages for easier product comparison?
The following retailers show display it on the shopping cart page by entering your postal code:
- Best Buy and Walmart auto-fill the postal code and estimates shipping for non-logged-in users (presumably based on IP address)
- Sport Chek lets you enter your postal code to estimate fees
- Etsy displays the fees for each item and the sum, but
The following stores don’t show shipping fees on the cart page, but on the next page after you click the “Continue to checkout/Checkout” button:
Taxes and shipping are calculated at checkout
- Shopify stores
- Old Navy
Ideally, companies should provide full price disclosure to the customer clearly and up front before they start the purchasing process.
If I’m logged out they can use my IP address to get a precise enough location to estimate the delivery fee and if I’m logged into my account, they likely have my full postal code and/or shipping address, so I don’t see any technical reason why estimated shipping could not be displayed earlier in the shopping process.
Ideally, in order of “up-frontness”:
- Category/listings pages for direct price comparison
- On product pages
- Shopping cart
- Checkout pages – before filling out personal and billing information forms
- Checkout pages – after filling out personal and billing information forms
Drip pricing is explicitly recognized as a harmful business practice in Canada
June 23, 2022 – amendments add a new provision confirming that drip pricing is a false or misleading representation and is prohibited in sections 52(1.3) and 74.01(1.1).
- Petition for Rulemaking Concerning Drip Pricing – Institute for Policy Integrity (2021)
- Drip Pricing When Consumers Have Limited Foresight – University of Pennsylvania (2017)
Over to you
Other than the examples above, are there any industries or companies in which you believe you may have been a victim of drip pricing?