Training Customers To Pay For Extras

Are airline passengers turned off by the unbundled pricing? Especially the baggage fee? Southwest, whose marketing campaigns push  “Bags Fly Free” , says it has data that shows customers do not like paying baggage fee. In one of my previous posts I wrote about the total profit of $536 million   that other airlines brought in the past year from baggage fee. Southwest’s Vice President of Marketing and Sales, Mr.Kevin Krone says, there is more to it than this expected profit from baggage fee.

The Dallas company says it has commissioned several comprehensive market studies that show the public has not accepted baggage fees, even as it pays them. Company officials also believe that passengers are still sorting out the idea that not every airline charges a fee for luggage, and they believe Southwest ultimately will benefit as public awareness spreads. “If [bag fees] were accepted, then I think we’d have to think really hard about it,” Krone says. “But our research shows that people are upset by [fees]. It is emotional. It’s hard to avoid it.”

On the other hand, US Airways wrote in a newsletter to its employees:

“When airlines first introduced charges for checked bags and a la carte-style pricing, customers resisted the change. Now, with the majority of major airlines collecting these fees for more than a year, customers are less likely to complain to the DOT.”

Can both arguments be true? Yes. It depends a lot on the segments they were studying and how the questions were posed. There is also the difference between attitude and behavior.

Customers did not like paying extra for the bags at first because their reference price was $0. If we were to survey customers about their willingness to pay  $15 (or $25) for bags, they are not going to accept the fee. This is what my colleagues and I found in a research. But if we positioned it differently customer’s resistance goes down. So  Southwest is correct in that in general customers will not prefer to pay but there are ways to overcome this. That said, I am not sure if Southwest did conjoint analysis to find customer preference for different factors and found that customers assign  high negative utility values to baggage fee. (We have done this study but we have not published the results.)

US Air’s claim is supported by their passenger data. There is also previous  research that find reference price is not a fixed number. Customers can be trained. Reference price  is malleable  according to Thomas and Menon (Journal of Mkt Research, 2006).  So USAir is correct as well. After an year of paying for bags and after seeing almost all airlines doing it, the reference price customers assign for checking in bags increased as well. Southwest’s goal, with its marketing campaign is to keep the reference price anchored down at $0.

Consumer behavior research shows people tend to discount future costs at a much higher rate than they do future benefits. This is the reason we do not mind eating fatty food and easily put off exercising. When booking a ticket, the customers see only the current price they pay and are oblivious to additional fee they might pay for bags. Even if they do (like some websites help customers see the total price) the mental discounting might push them to pick the option that has lower ticket price.

Questions  come to mind on whether people consider  Southwest as their first choice and whether the fact that bags fly free comes to customers mind when they look at Southwest vs. another airline.  Southwest also spent money on their current Bags Fly Free campaign while other airlines did not have to. Could Southwest have spent the marketing dollars on training customers to accept the fees and turned higher profit than their current profit from the reported  increase in passenger traffic?