Deloitte’s Simonetto: “It’s easy to view this as the big, bad airline taking advantage of travelers”

Mike Simonetto is the principal and global leader of Deloitte Consulting’s pricing and profitability practice. With airlines and other travel companies testing our willingness to pay fees, I wanted to ask a pricing expert like him why travel companies were doing this and where it’s all headed.

How did unbundling and a la carte pricing get started in travel?

It’s easy to view this as the big bad airline taking advantage of the travelers.

This is an extension of revenue management. I should define revenue management for you: Travel companies have high fixed asset costs. You’re trying to use those assets as much as possible. For example, a hotel room is a time-perishable product. If it doesn’t get rented this evening, it will never be able to get rented again. So any revenue is better than none. That’s revenue management, and that that originated with American Airlines 30 years ago.

To give you any number would be misleading. It could literally be one dollar to a million dollars. There are such disparities.

But you won’t lose money?

You should at least increase profit, or compensate for fluctuating margins that are driven by other factors, like fuel.

Travelers do not seem happy about unbundling. They complain that the price they have to pay isn’t the price that was first displayed. How much of an issue is this for businesses that are unbundling their prices?

You have to weigh every unbundling decision against the consumer reaction. There’s a strategic payoff. One of these companies takes a step, and everyone quickly follows. Whoever does it first gets slapped around, but then they all follow.

My assumption is that American Airlines looked at its decision to start charging for the first checked bag from a strategic position, and said the benefits outweigh the negatives.

Is there an ethical way to unbundle a fare, in your opinion? Can you think of a business that’s done it right?

I think you’ve seen unbundling in the telecom industry. Basically, when you can better match what you’re offering to what you want.

Cable TV is an industry that should, but won’t. I watch five channels. But in order to get them, I have to buy this huge bundle. I would much prefer to pay for just those five channels. I would probably pay a premium for it. But my choices are limited.

Is there a wrong way to do it?

Yes. Unbundling arbitrarily, and with no advanced warning. Also, when you do it without laying out the logic.

Another mistake is ignoring customer segmentation – not taking into account what your customers do for your business. On some customers, you’ll never make money. You can charge them for luggage, and drinks and to recycle the cabin air – and you’ll never make money from them.

It’s all about doing this with complete information. Across-the-board changes don’t work.

Is there a better way for the travel industry to charge for its products a la carte?

Hidden charges are not something I would recommend. When you surprise customers with charges, you’re driving them away.

There also has to be something for the consumer. The fees need to be logical, they need to make sense. The changes need to be consistent, at least in the way they treat their segments. It has to be fair.

There are those who say the government should begin regulating the way travel companies quote their prices, particularly airlines. In your opinion, what kind of regulation would make sense – if any?

Regulations are important, but enforcement is another. I think there’s something required there, but how can any law be enacted and effectively be enforced? Enforcement is everything.

We’ve already seen “zero” fares in other countries, where fares are said to be free, but other items like taxes, fuel surcharges, reservations and luggage, are then added to the ticket. Is this where we’re headed? Is that where we’re headed?

It depends. There’s a point of view coming out, that myself and some partners have written about, that deals precisely with this issue.

How do you deal with “free”? What if you were given your car for free, but you could only get gas from one type of gas station. It’s out-of-the-box thinking.

Free is not necessarily bad. If you think of the comp model in Vegas, you’re getting the room for free, but [the resort is] making money from gambling.

All this needs to be laid out up front. No surprises after I hit the “book” button. Here’s what free really means.

Why do travel companies continue to surprise their customers with fees? Is there a benefit to “gotcha” charges?

I’m sure there are people who say, “Oh, that $20 resort fee is immaterial.” There’s a mathematical model that can be run, that can determine what will not matter to the customer.

So fees are a factor of a surprise algorithm. That’s interesting. Can we even rely on a fixed price anymore?

In the future, everything may be a negotiation. If I have to price match, then I, as a business, have to be somewhere different on the cost.

For customers who learn to operate in the information age, this will be the way of doing business. The others will get scammed. There will be a a segment of society that will be cut off and always pay a premium, because they don’t have access to the information.

Christopher Elliott is the author of Scammed: How to Save Your Money and Find Better Service in a World of Schemes, Swindles, and Shady Deals. Critics have called it “eye-opening” and “inspiring” — it’ll “grab your attention and won’t let go.” Order your copy now on Amazon, Barnes & Noble or iTunes.

Tagged as: A LA CARTE, FEES, FUTURE, MIKE SIMONETTO, surcharges

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