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The Wi-Fi Riddle - Price Sensitivity

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March 28, 2014
Michael Schubach - michaelschubach@me.com

Why do luxury hotels charge for Wi-Fi, but cheaper hotels don’t? Investigative journalism was edging toward a stunning exposé. 

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My friends at National Public Radio (npr.org) are a constant source of inspiration. On a recent broadcast of Marketplace®, in a segment they call “I’ve Always Wondered,” a glaring spotlight was turned upon our own beloved hospitality industry with an in-depth question from a puzzled listener that I’m sure resonated with more than one or two – perhaps as many as a dozen – of their listeners: Why do luxury hotels charge for Wi-Fi, but cheaper hotels don’t? I tensed. My heart pounded. Investigative journalism was edging toward a stunning exposé. 

To get a better understanding of the intricacies of this conundrum, Marketplace enlisted the aid of Toni Repetti, an assistant professor at the William F. Harrah College of Hotel Administration at the University of Nevada, Las Vegas. In an economics-based reply that gives E=MC2 a run for its money, Professor Repetti exercised the nuclear option and blew the lid off of one of our industry’s best-kept secrets. Her searing response: “The easy answer is because they can.” 

Concerned that their Puzzled Listener (PL)may not have grasped the full significance of Dr. Repetti’s insight, the Marketplace reporter asked if the PL was okay with the answer. In a response that I thought was remarkably shrewd for a person who couldn’t understand being charged for Internet access in the first place, the PL expressed her need to dig deeper. “It was not satisfying,” she said, “because that’s the reason everyone charges for something.” So deeper we went.

It seems that the underlying economic concept at play here is price sensitivity, the degree of a consumer’s psychological reaction to a commodity’s price. Price sensitivity is not the same thing as the consumer’s personal threshold of expensive but rather what seems expensive (or excessive) to that consumer in the context of the situation. Let me see if I can give an example of my own that I think would resonate with at least a dozen of you. Let’s take a hypothetical fast-food purveyor that I’ll call… oh, let’s say…O’Donald’s. Let’s say this nonexistent fast-food source – clearly of Irish rather than Scottish ancestry – serves a nonexistent meal made up of various nonexistent chicken parts. Not parts, exactly – more like chicken chunks, morsels perhaps, or manufactured tidbits. As unattractive as it may sound, let’s refer to these unidentified, no-longer-flying chicken objects as “O’Nuggets.” And now, let’s say that you, savvy consumer that you are, order a quantity of these O’Nuggets, secure in the understanding that the price includes a dipping sauce of some sort. You and the purveyor have agreed upon a price. But suddenly you are having second thoughts. Because hunger overruled your higher brain functions, you have ordered a quantity of nuggets (four) that exceeds the dipping sauce’s maximum coverage capacity. You politely ask for a second serving of dipping sauce.

The response to your request is immediate and final: an additional charge of $0.25 applies. (There was a time at O’Donald’s when staff members would respond to such requests by issuing a fistful of sauce packets at no charge. But a few rotten apples spoiled that barrel; greedy consumers – not the savvy ones like you – took dipping sauces home, ten thousand packets to the gallon, and hoarded them in anticipation of Armageddon. In the face of such willful abuse of its generosity, O’Donald’s responded as only multibillion-dollar organizations can: their terrible swift sword cut off the world’s free supply of tasty dipping sauces. Am I still hypothetically bitter?)

And now you, a connoisseur of life’s finer offerings, who has been known to purchase a second $80 bottle of Pinot Noir with the wave of your hand and the waggle of a finger directed at an empty wine glass, find you’ve lost control of what little was left of your higher brain functions and are in the midst of making a public spectacle of yourself by screaming at a high school student who is simply doing his utmost to complete what is obviously an urgent cellphone conversation. That is price sensitivity.

To have, or not to have, price sensitivity – that is the question. And I think the hospitality industry answered it definitively quite some time ago. As the radio exposé exposed, those who stay in expensive hotels have little or no price sensitivity to Internet access charges. Why? Because business travelers, a significant percentage of hotel Wi-Fi service users, typically submit Wi-Fi charges for reimbursement on their expense reports. Their out-of-pocket expense? Nothing.  Are they deliriously happy that they are – correction: that their company is – being charged for Internet access? Perhaps not, but regardless of how that particular consumer feels about the charge, it’s hard to take umbrage at a net cost of zero.

What about the traveler who pays his own way and demands nothing but the best? Ironically, I began my career in hospitality technology (as distinct from guest-facing service or hotel management positions) with a company that owned and operated a five-star, five-diamond hotel in Beverly Hills. We catered to the entertainment industry, and here “catered” is a very precise word choice. Our target audience was the top 5 percent of the traveling public and I learned important life lessons by serving those for whom service is an expectation. What quickly becomes clear is that the very wealthy won’t pay something for nothing but there is virtually no limit to what they will pay for anything that they consider something. They populate a world that has a Rodeo Drive full of shops that carry blue denim trousers (we, the underclass, call them jeans) that retail well into the thousands of dollars. Purchases are justified by the exquisite fit, the hand detailing and thread that was excreted by the finest silkworms, but at the end of the day they’re still blue denim trousers that are sported from waist to ankle, and, when worn in combination with a sweatshirt, makes the wearer look remarkably like someone on his or her way to the supermarket. 

People with this kind of disposable wealth can view prices of less than $10,000 as pocket change expenditures. These are people who have been known to purchase a third or fourth $2,000 bottle of wine with the wave of a hand and the waggle of a finger directed at an empty glass. Internet access fees? Please don’t waste their time discussing such petty matters.

At the other end of the spectrum are those who sleep in cheaper accommodations and probably don’t have the luxury of an expense account or wealthy parents. For them, Internet access is free because it has to be; they simply eliminate the purveyors who don’t compete for their patronage by providing the service without charge. Here, price sensitivity isn’t an issue; it’s the issue.  

Professor Repetti’s easy but perhaps unsatisfying answer was in fact exactly correct: cheaper hotels don’t charge for Wi-Fi because they can’t and expensive hotels charge for it because they can. Will this always be the case? Probably not; although the bastions of the wealthy will always stand, and hotels are trending toward free Internet access as I type. But for now, this insight into price sensitivity versus price makes perfect sense, and explains why we’re doing what we’re doing and to whom we’re doing it.

But don’t get me started on hypothetical dipping sauces. That is a whole other issue.

Michael Schubach is a regular contributor to Hospitality Upgrade and can be reached at Michaelschubach@me.com.

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