Airlines and Innovation

The design company Teague recently shared some ideas on how it would remake the airline experience to meet the needs of the modern traveler. They are:

1. Ban Carry-on Luggage
2. Make Middle Seats Feel Exclusive
3. Encourage Amazon Prime-Style Memberships

There are important lessons for pricing here to unpack. By better understanding how customers perceive its value proposition, a company can not only delight its customers and increase brand loyalty, but also increase revenue while innovating ahead of the competition.

Ban Carry-on Luggage

This suggestion may seem strange at first. Why restrict what your customers have become accustomed to bringing with them? Surely this would be a disruptive change, not only in approach but in the customer experience.

It is important to clarify that this suggestion still allows for personal items, such as a small purse or briefcase, in which customers can have the items that they truly need for the flight. Few travelers actually access their larger carry-on suitcases during the flight. They avoid checking them merely because of the added cost and inconvenience.

From a purely mathematical perspective, paying $25 to check a bag on a $500 flight shouldn’t feel like a big charge. It’s only a 5% surcharge. But customers have a much more complicated relationship with such fees. Travelers feel the checked baggage fee especially painfully, and the profligate use of carry-on luggage bears testament to this.

Companies must always be looking for ways to capture more of the value that they offer to customers. Charging for luggage was a clear way to assign some of the extra cost of checking and handling luggage, as well as for the marginal fuel consumed with its added weight.

But a perverse incentive has developed wherein passengers try to bring into the seating area everything they possibly can. This creates its own set of extra costs in terms of boarding and deplaning times, larger luggage racks, and the increased hassle for all customers and employees alike. Thus, even if a fee is relatively small and at least hypothetically connected to the cost of providing the service, it can have an outsized effect on customers’ perceptions. Is there a fee that functions similarly in your industry?

Teague suggests that Airlines could speed up their boarding process by 71% by banning carry-on luggage. That would have dozens of positive ramifications, from operational efficiency to customer satisfaction. In order to better justify the baggage fee, airlines should also look for more ways to improve the luggage process. By changing what currently is one of the least pleasant aspects of travel into something that leaves their customers less stressed and better served, an airline could strongly improve its competitive positioning while maintaining (and better justifying) its pricing structure.

Make Middle Seats Feel Exclusive

Few travelers prefer the experience of sitting in a middle seat, so you might wonder why airlines don’t price them differently than either the aisle or window. Attempts to do so were met with criticism and claims that the practice discriminated against families who needed to sit next to each other. If price isn’t a tool available to improve the experience of the middle seat, perhaps there are other methods available.

Changing the value proposition of less-appealing offerings is key to managing customers’ perceptions and therefore differentiating oneself from the competition. Teague recommends making the middle seat a “promotional class,” where consumer brands such as Nike could pay to give the seat a makeover and offer special experiences to the seated. This could help airlines better reach capacity, earn additional promotional revenue, and improve the flying experience for a full third of their passengers.

If you had an opportunity to delight a third of your customers at no extra cost, would you do it?

Usually, the conceptual equivalent of middle seats for products or services are seen as an unfortunate consequence of the product or service provided. What this idea illustrates, however, is that, as always, value is subjective. With a few tweaks, a less desirable product or service could become its own niche premium offering with more value for both the customer and the provider.

Encourage Amazon Prime-Style Memberships

Airline reward programs are some of the most convoluted systems to navigate as a customer. They are notoriously complicated both in terms of earning and redeeming rewards. As a method of customer retention, there are surely better methods being pioneered in other areas of the economy that could be applied to this situation.

Amazon Prime, the yearly-fee membership that offers faster free shipping and other perks, has been extremely successful in encouraging customer loyalty. Starbucks sells over a billion dollars in prepaid gift cards a year, increasing not only customer lock-in but also its financial performance just on the interest payments from holding that money.

Teague encourages airlines to look beyond credit cards and earning miles in order to create more effective loyalty programs that not only make customers return but return with a smile. Some ideas include creating a marketplace for reselling tickets or prepaying yearly for certain privileges on all flights.

People enjoy associating themselves with brands if brands give them a reason to do so. They will show surprising loyalty (and therefore less price sensitivity) if they perceive value from doing so.

Takeaways

Customers are not so much price sensitive as they are value sensitive. As the success of Amazon and Starbucks memberships shows, they will happily pay more for better service and an improved experience. The marketing guru Seth Godin recently wrote:

“If people aren’t buying your product, it’s not because the price is too high. It’s because we don’t believe you enough, don’t love it enough, don’t care enough.”

If a company tries to compete primarily by having the lowest price, it sends the message to its customers to think of its products only in terms of price.

Whereas airlines are a particularly visible example of an industry struggling with price structures and value offerings, every company in every industry should pay close attention to their customers and what their customers value. Airlines are a particularly visible example of an industry struggling to think creatively about how best to capture the right price for the value provided.

Every pricing structure is contingent on how customers perceive value, and every pricing strategy must be a strategy for innovation.