iven the low demand levels and hesitancy of many people to fly, ancillaries are an effective way for airlines to generate income and increase immediate cashflow.
After all, it’s easier to upsell travelers with a known intent to fly rather than trying to convince others to fly who may have no interest in doing so.
It’s worthwhile for airlines to focus their attention on increasing customer lifetime value (CLV) instead of spending too much time, money and resources on customer acquisition.
Increasing ancillary revenue doesn’t come without its own set of challenges. Let’s have a look at some of the tactics that can be deployed to increase ancillary revenues.
Price framing isn’t a new marketing strategy and easily spotted. In fact, we see it on many airline's availability page.
People evaluate prices and products to a comparison point. Airlines display high, medium and low priced fares together. This causes the customer to compare the products to each other and impacts the value the customer places on each product.
There's strategy around what products should be included in high, medium and low priced levels to make the high and low prices appear unappealing and the mid-point seem like the best value.
The mid-tier product may actually include a product you don’t need and cost a few dollars more than you initially expected to pay. This strategy is great for bundles, branded fares and can even be expanded to individual ancillary products.
The Contrast Principle affects how we see things that are presented after each other, which is particularly significant in today's economic environment.
Let's use buying a car as an example. I go to Toyota and I test drive a Corolla. The base model is priced around $20,000 MSRP and I have the option to add accessory upgrades ranging from $200-$600.
Lexus is a higher end brand owned by Toyota and their cars start at $40,000. I can add upwards of $2,000 in packages to my Lexus.
Toyota could make an offer to add a $2,000 package upgrade to my $20,000 Corolla but that’s a 10% increase in the price and in comparison to my initial price the increase seems huge.
It is unlikely I'm going to take that upgrade. Now a $2,000 upgrade on my $40,000 Lexus is only a 5% increase in price and seems inexpensive in comparison.
Applying Pricing Strategies to Ancillaries
We see the same phenomenon in ancillaries and airline tickets. If my ticket costs $200, a $75 upgrade doesn't seem that expensive. But when a ticket costs $50 even a cheaper $50 upgrade doubles the initial price and doesn’t seem like a good value.
I would go as far to say the lack of ancillary spend on cheap tickets is driven by psychology, not solely because these customers are extremely price sensitive (some may be). If we want to upsell customers to buy more products, we'll have better luck if the ticket is more expensive. Or simply display a more expensive price first, then offer a deal to make the sale.
"In our current low-fare environment we need to offer the appropriately priced ancillaries to each customer."
If I’m car shopping and see a Lexus first at $40,000 then a Corolla at $25,000 seems much more reasonable in comparison, even though I'm actually paying above MSRP.
In our current low-fare environment we need to offer the appropriately priced ancillaries to each customer. We can't offer a Corolla with Lexus priced upgrades; it takes understanding the customer and the value of the ticket they are purchasing to know what ancillaries to offer, at what price and when to make the offer.
Does the customer that spends $50 on their ticket feel like they are nickel and dimed? Yup, they do and they are going to be on guard against nickel and diming strategies, especially during initial booking.
If I buy a $50 ticket and a few weeks later the airline shows me some upgrade options (most expensive first of course) I'll have forgotten how much I initially spent, changing my frame of reference and making me more open to an upgrade.
On the contrary, if I start by booking by selecting a $200 ticket offering me additional ancillary products during booking may be received better.
Be Mindful of Base Fares
Of course, to try any of these strategies the customer needs to get to your website and the way to do this is to advertise, or be known for, the cheapest fare. The nature of driving down ticket prices and undercutting your competitors hurts your potential to sell additional ancillaries because they look more expensive in comparison.
This becomes a bit of a balancing act between getting your customers into your storefront, while not cannibalizing your own revenue potential. That’s why it’s best to stay focused on the big picture and work towards your overall revenue targets.
"The nature of driving down ticket prices and undercutting your competitors hurts your potential to sell additional ancillaries because they look more expensive in comparison."
Low fares may drive price sensitive behavior but there is an opportunity to enhance post booking purchases as consumers have shown interest in purchasing ancillaries after the initial booking.
During a presentation at the World Aviation Festival, Atmosphere Research Group’s Henry Harteveldt presented the following proprietary data.
Besides seat assignment, their research shows that most consumers prefer to buy additional products after they’ve booked their ticket, showing interest in everything from seat/cabin upgrades to sightseeing tours.
There are still ancillary revenue opportunities on the table. Now is the time to get creative and test new retailing strategies and experiment with different product offers and placement.