Evolution of Unbundled Pricing – From Service Reductions to Enhancements

Five years back, during the dark days of  the Great Recession, we saw the early stages of unbundled pricing. Specifically, airlines seeing considerable drop in passengers and hence revenue per passenger mile, increasing costs and increasing price competition needed a way to stay afloat.   The had excess capacity, exhausted their marketing spend, lost the ability to differentiate on the offering and were left with no real option to increase passenger miles flown.

So they chose the only choice available to them. Keep the ticket price competitive because customers were making decisions based only on price but separate out everything else that used to be included in the price of ticket and charge for it.

Whether unbundling the extras resulted in any cost savings is debatable. There was a case that each piece of checking baggage had a marginal cost of $15. It is however difficult to see how they can so precisely pin down cost one additional bag checked in. The primary effect of unbundling was not cost reduction but revenue generation.

feesCheckin bags? Need a drink? A pillow? Take out your credit card.

Some went even farther, charing for paper ticket, reserving through an operator, or picking seats.  Or more recently charging for printing boarding pass at the gate and carryon bags (Frontier).

Naturally customer backlash ensued. You may not remember it now but we all felt nickel and dimed paying for extras. That as I explained before was the reference price effect. We don’t feel that way anymore because fees have become the new norm and the reference price has moved from $0.

What started out as Nickel and Diming was nothing more than draining the stream to expose the submerged rocks blocking the value flow. There was no clear defensible reason other than convention why all the different extras were included in the price of ticket.  For one thing these added costs but as I said before more importantly they represented value capture opportunities. With all inclusive pricing Airlines could not figure out those opportunities.

Yes there was backlash and late night talk show jabs.  After all jokes are done the fees became a significant source of income (yes almost all of revenue flowed directly to profit to airlines. By the last measure airlines took in $6.1 billion in fees in 2012 and on track to double in 2013. What started out as an irritant to customers and a service restriction has become a significant revenue source.

These days airlines have changed their thinking process with regard to monetization. The default is not what additional services will help increase brand value, differentiation and ticket price but what new products we can introduce that will help add yet another revenue source.

It is all unbundling.

These days airlines see themselves as product managers – not the type you have in mind, the one worries about details, buttons, bevels – the kind that worries about what customers value and how they can deliver a product that captures that value.

“We’re a retailer trying to create a product line,” said Rick Elieson, American’s managing director of digital marketing.

After all a product is nothing but a value delivery vehicle.

Do customers value the flexibility of changing flights without having to pay change fee? American create a product branded Choice Essential—priced at $68  travelers can change reservation without a fee.

If one price is good, two are better. So American also has Choice Plus package, priced at $88 that lets you stand by for a different flight on the same day.

Travel a lot and want to save the hassle of paying for bags each time? United makes it easy for you with a product that lets you pay a flat $399 fee for the whole year.

Want to get better seats? You have economy plus product. You can also get yearly subscription for $499 without shelling out a fee each time.

In essence they have become a retailer or merchant. They are not anymore ripping out roofs in third class train cars (because there is no more roof), they are selling shades and umbrellas to the  customers in the roofless cars. They also are selling value added items to those in second class cars.

“We’ve moved from takeaways to enhancements,” says John F. Thomas of L.E.K. Consulting. “It’s all about personalizing the travel experience.” (Source)

That is what understanding your customers can do for you.

Do you enforce takeaways to limit your customer usage or enhancements to create and capture value?

2 thoughts on “Evolution of Unbundled Pricing – From Service Reductions to Enhancements

Comments are closed.