News Analysis: Fee Fatigue Hits Consumers
For years, corporate America has raised fees for products and services with little fear of widespread backlash. In times of prosperity, fee hikes of a few dollars usually slipped under consumers’ radar, buffered by rising wages and standards of living. But as the economic slowdown enters its fifth year, consumers weary of fee fatigue are finally starting to bite back.
This week, Bank of America will cancel a planned $5 monthly fee for customers who use their debit cards as credit cards to make purchases, following an outpouring of customer anger and retreats by several other banks from similar plans, including Wells Fargo and J.P. Morgan Chase. The fees also came under fire from President Obama and Sen. Richard Durbin (D-Ill.), reflecting the importance of this issue to public opinion.
Bank of America’s walk-back came not long after the public relations disaster that embroiled Netflix when the company announced it would raise monthly fees by as much as 60%, from $9.99 to $15.98 for combined mail and streaming movie delivery. The move was part of a larger plan to split the mail and streaming businesses, but the company failed to explain this until several months later, inflicting even more damage on itself. (Major subscriber outrage prompted Netflix to scrap the idea of separating the mail and streaming businesses, leaving the impression of a company adrift and paralyzed by a crisis of its own making.)
Although Netflix has yet to blink on its planned increase in subscription fees, the company has paid a price for its repeated blunders: Some 800,000 subscribers canceled their Netflix accounts in the third quarter, causing the subscription base to shrink 3.3% from 24.6 million to 23.8 million. That’s quite a bit lower than the company’s initial projection of 25 million subscribers at the end of the third quarter.
As a result, Netflix stock price tumbled from $118.84 before the losses were revealed to $80.62 today.
Attempting to staunch the losses, in a letter to shareholders Netflix CEO Reed Hastings said the company would stick with the new prices but acknowledged the reality of fee fatigue: “We compounded the problem with our lack of explanation about the rising cost of the expansion of streaming content, and steady DVD costs, so that absent that explanation, many perceived us as greedy.”
The only really surprising thing about the new price sensitivity among American consumers, however, is that it took this long for the effects to become visible. Adverse economic conditions have taken a big bite out of wages and average household incomes, while prices for necessities like food and gas continue to climb.
In 2010 dollars, real median household income in the U.S. fell 6.4% from $52,823 in 2007 to $49,445 in 2010, according to the U.S. Census, marking three straight years of consecutive declines. Although data is not yet available, median income is unlikely to have recovered much in 2011. In inflation-adjusted terms, this is the lowest U.S. median household income has been since 1996, when it came to $49,112 in 2010 dollars.
Household purchasing power is even lower in the context of rising prices for basic necessities.
Overall inflation was 3.9% for the year ending in September, with even bigger increases in key categories like food and fuel. According to the Bureau of Labor Statistics, average food prices increased 8% from September 2010 to September 2011, including a 6.2% increase in average grocery store prices.
Gas prices have moderated somewhat in recent months, with the average price per gallon dipping from a peak of around $4 in early May to around $3.45 today. However, that’s still well above where it was just a year ago, at $2.80 in November 2010 -- without much evidence of a broader economic recovery to offset the impact of this price increase in the intervening period.