Proposal | reboot10 – 2 comments
The economics of ‘free’ travel
or a cautionary tale of ancillary revenue
American Airlines has just announced that it’ll charge passengers $15 to check in bags, Ryanair sells you everything from lottery tickets to (marginally) faster boarding, and easyJet makes millions of pounds every year from people who want to change the names on their tickets. But the flights themselves are free, or nearly free.
It’s an old trick. Entice customers in with low ‘headline’ prices, and then slap on a few more-or-less compulsory ‘extras’. But now even the full service airlines are doing it. Looking at the fare breakdown for my flight to Copenhagen, I see something like this:
Fare (A1): BA LONCPH ONCLON1 fare (rules) £21.00 Tax: United Kingdom Passenger Service Charge £17.60 Tax: United Kingdom Air Passengers Duty £10.00 Tax: BA YQ surcharge £15.50
But that’s before BA have tried to upgrade me to business class, sell me travel insurance, hotels, car hire and so on. You can see why they’re doing it, though — if the total going to BA is only £36.50, £3 commission from a hotel affiliate (for example) represents almost a 10% increase in revenue.
Discounting blatant loss leaders, will there come a point at which airlines (and other transport companies) can afford to carry everyone for free? Free flights on the grounds that a sufficient number of people will pay for checked luggage and something to eat? How about free train travel on the basis that a similar proportion will pay for on-board wifi or beer? Or free ski passes on the grounds that they’ll want some gluwein on the way down?
Pricing models like these have always fascinated me, and I’d like to talk about three things:
- behavioural economics: why people react well/badly to certain pricing decisions
- the airline industry: cost cutting and cross selling
- horizontal applications: where else might this model do well?
Further reading:
- Bounded Rationality: www.princeton.edu/~kahneman/docs/Publications/Maps_bounded_rationality_DK_2003.pdf
- easyJet investor presentations: easyjet.com/EN/Investor/
Réacteur -
by darkpatator
2 comments
Willing to pay more for ‘free’?
— of course, what you’re actually willing to pay more for is convenience, peace of mind, service; the list goes on.
Would these aspects of the product (a plane ticket, a mobile calling plan) have the same value if they were described as ‘free’? I suspect that context is important here: my mobile operator uses terms like ‘included’ and ‘unlimited’; equally, full service airlines don’t scream FREE REFILS, even though this is implicit in their offering.
Description is everything, in many cases...
Free travel
Interesting also to compare/contrast these kinds of schemes with the Free Razor - Pay for the razor blades type of model. Or, buying a $50 printer, and then paying $50 whenever it runs out of ink.
There's an important element of whether it "feels right", whether one has a certain psychological sense of whether it is fair or not. At first I might enjoy buying a cheap printer, but I feel angry whenever it runs out of ink. It does that much too quickly, an the prices of ink cartridges seem like a complete and blatant rip-off. They can't cost more than $1 each to manufacture. I'd rather pay $500 for the printer and get the real price for the ink.
Personally I feel the greatest satisfaction from "unlimited" sales, where I pay one price, and then I get stuff for free afterwards. I'd prefer a plane ticket where they give me a sandwich and a glass of wine for free, and I could ask for a refill. That buys my satisfaction and allegiance much better than if I got the ticket $8 cheaper and then had to pay for those.
Likewise, I'd rather pay a higher price for a cell phone subscription with unlimited minutes, SMS or data, or whatever, than paying a much lower price and paying for the traffic, even if I'd end up paying less than way.
Peace of mind is something I'll pay for. I'm happy to have a bit of pain up front, to buy myself freedom in the future. I like to invest in freedom, as opposed to getting it free up front, and then being screwed from there on out.