Monday, March 1, 2010

Unpopular Pricing

We've heard a lot about one health insurer raising its rates by up to 39 percent. Yet in the past year, the price of another widely used commodity has gone up 50 percent industrywide. Not only that, it's for something that was free prior to 2008: the privilege of checking a bag on a U.S. airline. The average price for the first bag is now around $25.
Everyone hates paying to check bags — so much so that we're breeding a wrinkled generation of travelers living out of a carry-on and washing clothes in expensive hotel sinks. People who could well afford the fees refuse to check bags — "it's the principle of the thing!"
Charging for bags is an example of what price consultants call unbundling (and everyone else calls "nickel- and diming.") Instead of offering checked bags (meals, headphones, blankets, etc.) for "free" with the ticket, they price them separately. The reason is simple: Most travelers pick an airline based on the lowest fare. Think what the hotel business would be like if everyone refused to pay a penny more than the Motel 6 rate.
Some quick math suggests that a $25 baggage fee isn't excessive. That's something like a dollar a pound. If airlines charged passengers by the pound, $1 a pound would be a good deal for cross-country travel (even for Kevin Smith). But that's logic, and emotion is something else again. We all remember the days when baggage was free. That makes any charge seem like a gouge.
Unbundling is a powerful technique for drawing customers. They just might not be happy customers. The people who pay the fees resent them, and the people who refuse to pay resent the airline for making them live like hobos. The culprit may not be the airlines so much as human nature. Because prices are quantitative and easily compared, they carry undue weight in our decision making. We don't pay quite enough attention to the intangibles of comfort and convenience, simply because they are intangible. In another context, this is known as "megapixel bias." Camera buyers favor cameras with more megapixels, even though such cameras don't necessarily produce the best pictures. But megapixels are numbers, and everyone knows an 8 megapixel camera has more of something important than a 7 megapixel model does. (They know this, even if they couldn't begin to define the word "megapixel"). In reality, picture quality is determined by many subtle factors that aren't easily compared on a spec sheet.
In a recent New York Times piece, airline industry analyst Robert W. Mann asked, "How do you run an industry where people hate you?" It's a good question, and so far, no one's found the answer.

4 comments:

  1. On the other hand, should the airlines that do not charge separately for bags give a discount to customers who do not check in bags?
    As I have said before in our previous email conversations I am proponent of matching value with price.If it is important and adds value to customers to check-in bags then brands must get a fair share of it bu charging for it. Customer backlash comes not from the repugnance for extras but because of their internal reference price. Any price over this reference price will be seen as not so good deal by the customers. In the case of unbundling, customers never paid for the extras and hence their reference price is zero. My research shows, customer backlash can be reduced if the the marketers first improved this reference price before charging for extras.
    Here are two links to my works on Unbundling:
    unbundling strategy: http://unbundling.wordpress.com
    Reference price research: http://bit.ly/ref_price

    Regards
    -rags

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  2. I specialize in explaining things in terms everyone can understand.

    Consumers naturally reject unbundling unless a perceived value is presented - the airlines failed miserably here.

    When you purchase your ticket the airline could simply ask you during "checkout" if you plan to check luggage. At that point you can do an estimate and add it on that way. Customers are much less likely to be upset if they pay when making purchases instead of at the check-in desk when they're already stressing about other stuff.

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  3. http://www.youtube.com/watch?v=TkO8j7FaQRo

    ReplyDelete