Quite a few years ago (ok, more than 2 decades, ouch!) I worked at IBM, selling to a large enterprise. IBM’s strategy at the time was all about bundling a full set of service/support (including on-site Systems Engineers for large accounts) as part of the price of mainframes.
That strategy started to break down with the entry of mini-computers and then PCs, with new buyers exerting control from outside the so-called “glass house” where mainframes lived. The upshot was my customer finally saying “no thanks” to the bundling, and requesting a la carte pricing that separated products, services, and support. It was a painful transition for IBM, which had to figure out how to sell and deliver fee-based services on their merits.
The airline industry has been dealing with the same thing, although the dynamics are a bit different. With rare exceptions there is little differentiation between carriers, and lots of consumers that simply want to get from point A to point B as cheaply as possible. Sites like Expedia and many others encourage price shopping, which keeps pressure on airlines to display the lowest fare possible.
In Europe, Ryanair seized this opportunity to offer a low-low fare that included a seat, oxygen, and not much else. At one point, bombastic founder Michael O’Leary said he was considering charging a fee to pee!
Along with low fares came poor customer satisfaction ratings. But it didn’t seem to matter. Rynair kept growing and O’Leary told passengers who complained to “bugger off.” That started to change in 2014, when O’Leary had a change of heart and began investing more in customer service. By 2015, he credited a rise in profits to this more customer-friendly stance.
In the US market, Spirit Airlines has been following a similar path, but appears to want to avoid some of the Ryanair missteps. Or perhaps, work through them more rapidly. “Ultra low” fares attracted passengers, but, like Ryanair, were followed by ultra low customer satisfaction ratings. Spirit entered the ACSI rankings at a stunningly low 54 in 2015, and increased to a still airline industry-worst 62 in 2016.
In 2013, then-CEO Ben Baldanza said “customers care about price” and “We have great customer service because we give them the lowest price possible.” Like O’Leary (before he got CX religion), Baldanza pointed to growth and investor performance as validation.
The drumbeat of negative press and declining stock price led to Baldanza’s ouster in early 2016. New CEO Bob Fornaro says the airline will continue its low/unbundled fare strategy, while also “improving its passenger experience this year, in addition to making the carrier more reliable.”
Based on many industry surveys, clearly Spirit has some work to do on its operational performance, including improving on-time performance, baggage handling, and customer service. But there are also improvements in store for the booking process, according to Rana Ghosh, Sr. Director at Spirit Airlines, who heads up the “ancillary revenue” initiative. That includes all the products and services outside the core ticket, such as baggage, a bigger seat, snacks, or hotels and cars.
Ghosh says “passengers are looking for the best value possible” but not everyone wants the same things. In a recently announced partnership with personalization vendor Qubit, Spirit intends to improve how it segments customers and then target offers for the ancillary services most likely to meet their needs.
For example, a small business owner might be interested in a larger seat, checked baggage, hotel and rental car. By using Qubit’s automated segmentation tools, an analytics-based persona could be created, tested with a subset of the entire audience, then rolled out if successful.
Ideally the result will be a win/win: the passenger gets a personalized booking experience and Spirit gets the additional revenue it needs to make the unbundled strategy work. Passengers should start to see some of these improvements later this year.
Qubit was chosen, says Ghosh, because of its all-in-one platform and cultural fit. Both are relatively small but fast-growing firms that see themselves as industry disruptors. In my previous post, I wrote that Qubit is pushing into the MarTech personalization space with a Digital Experience Platform that includes “adaptive targeting.”
Conceptually, there’s a lot to like about Spirit’s plan. I don’t mind paying more for items that I really want, while getting a good value on the core product.
The challenge will be — as it usually is with good ideas — execution. The promised improvements in operations will take time to implement and, I dare say, will cost something. That “something” will eventually be reflected in even the base fares that Spirit offers.
The booking experience is critical because it sets expectations. I think Spirit’s current web site does a good job explaining what it is selling:
Our fares are fully unbundled. No “free” bag. No “free” drink. Other airlines bake those options right into their ticket price. We don’t. A ticket with us gets you and a personal item from A to B.
The planned Qubit-based personalization could improve the booking experience while helping passengers make informed choices… and setting expectations. That’s all to the good for those that book directly with Spirit.
However, according to a NY Times article, new CEO Fornaro also wants to reduce surprises for first-time Spirit fliers. About one-third of customers book via third-party sites, which don’t do the same job setting expectations.
I gave this a quick test on Expedia, searching for a flight from Ft. Lauderdale to NY LaGuardia. Spirit’s posted fare was just $80 roundtrip, compared to a range of $132 to $149 for other major US carriers. Wow! All things being equal, if I didn’t want all the services bundled into the price, I might go with Spirit.
The problem is that the $80 fare increased by nearly $30 when I selected it. Expedia informed me: “Your ticket price changed from $80.00 to $109.98. The airline could not confirm the original price due to pricing or availability changes that occurred after we posted the latest prices on our site.”
The price change didn’t instill confidence in the low fares, and it raised some questions about exactly how I would pay for other services. There’s no obvious way on Expedia to select a bigger seat or pay for a checked bag, for example. That means more complexity, and perhaps some surprise charges, later on.
So Spirit not only has to upgrade its own booking experience, but also improve how it works with third-party sites. Still, I say this new strategy has some promise. As consumers we’ve all been trained by Amazon.com that low prices and good experiences can go together. Let’s see if Spirit can make it happen, too.
The “Your ticket price changed……” feels suspiciously like code for bait-and-switch. Having flown Spirit, and been singularly unimpressed with their commitment to customer value delivery, I’d be highly skeptical of anything they claimed, sort of like Comcast.
Rana Ghosh is right. You need to add value. Rana does not know how to measure value. He has to use the Customer Vae Added metrics
Great post, Bob. As customers have gotten smarter due to access to more and more information, they are getting accustomed to unbundled service. Jet.com lets you waive the right to return an item for a reduction in the price. Who realized returns were a cost built into the price. The challenge as you stated is getting third parties to play by the same principles. It was not that long ago that you could only book a Southwest flight online through Southwest.com. And, it was a challenge for travel agents. But in time there was accommodations on both sides of the equation. I predict if Spirit’s new makeover shows success in the marketplace they will find ways to get their customers precisely what they want. Remember the old sales line, “I can get it for you fast, good or cheap–pick two! Today’s customers not only want all three–they also want it “my way!” Not only can low price and great CX coexist, it should happen that way.
It’s interesting to look at the price/experience equation with the airline industry as a model. It’s an industry that, for decades, has focused on reducing customer expectations.
With the exception of the removal of smoking sections and the addition of in-seat TV, the in-flight “experience” today is a faint shadow of what it once was. From punishing seat sizes to luggage fees to meal minimizing, ‘customer experience’ has been boiled down to a price/quality value equation.
I not entirely convinced that Spirit’s actions are, in fact, a Customer Experience construct. It strikes me as being little more than the ’90s “Value Proposition” model repackaged under the label “Customer Experience.” Are Spirit’s actions motivated by improving customer experience, or motivated by trying to find more revenue opportunities?
Is CX really this transactional in nature? One could argue, of course, that in-flight experience begins and ends within the confines of the 18″x32″ seat space, and the luggage/meals/movies one has purchased with it, but I think there’s more to it.
Shaun, Experience can be emotional also. But does it start with something transactional?
Great article. I’ve always believed the principle that companies can have two of three characteristics: quality, price, customer service – but not all three. I actually had a B2B software CEO tell me that his company’s goal was to produce the best software in the industry, at the lowest user price, and provide the highest level of customer service. Needless to say, they were not successful.
With that in mind, I agree with Ghosh that “passengers are looking for the best value possible” and that value has a different meaning for different types of passengers (e.g. convenience, pricing, add-ons, etc.). The goal of greater degrees of personalization and properly setting expectations is also worthwhile and probably achievable. Time will tell.
interesting thoughts, Bob. I think the question you ask in the title can be answered with a yes. The scale, however, is not the absolute price and where it ranks in the pricing of the competition. Instead it is what I, as the customer, perceive as value that I get out of the ‘deal’, which also includes reliability and a few other measures. Example from down here (NZ). There are mainly two carriers serving domestic flights. Jetstar, a budget carrier, and Air NZ, the dominant national carrier. I never fly the former, never (well, unless forced by someone), although they regularly offer far lower fares. Why? Because I had so many negative experiences with them, starting from booking to getting out of the plane again, which includes crammed seating, me not even be able to bring in my coffee (allowed in Air NZ albeit not needed there because they serve a coffee …) and more situations than I care to remember.
So, although I sometimes am unhappy with the price I pay I still think that I get a fairly low price and a more than OK experience with what I am flying.
2 ct from Down Under
Thomas
@twieberneit
Christopher,
I believe companies can have all three characteristics. That is what value is all about. But the degree depends on the customer’s idea of the value of what you are offering.
Thomas, with you on this
Thomas, in some case the absolute price does matter. If I can only spend $100 to travel and my options are car, bus, or an airline, I might well pick the airline even if the total experience is not great.
This is how Ryanair in Europe grew so fast. They didn’t compete with other airlines so much as other forms of transportation. My son gave them a try and found the value was still a bit of an illusion because you don’t realize all that goes into a travel experience until something is removed.
Like, for instance, Ryanair using 2nd tier airports not convenient to city centers. You save money on the flight and then give some of it back on ground transportation.
However, for experienced travelers with more latitude on spending, I agree that price is a way to evaluate value. If I can get the same overall flying experience (or nearly so) and save some money, I’ll view it as a good deal. That’s how Southwest in the US has built such a loyal following. They save money in a few non-traditional ways (like no assigned seats) that some travelers don’t like. But enough are willing to put up with it for an otherwise very nice experience, with well-trained and genuinely nice people.
Getting back to Spirit, their stated strategy is not to compete head-to-head to the big airlines on the major routes. If they can improve the passenger experience enough and build a loyal following outside of the price-is-the-only-thing audience, they could do well over the long term.
Shaun, regarding the booking experience, where is it written that improving the experience can’t increase revenue? That’s exactly what Amazon does. Spirit plans to assess the customer’s perception (via transactional surveys) and hopes to see ancillary bookings increase too.
It will take some time to see if Spirit’s new strategy will work. For now, I think it’s great that they are at least trying.
Bob, you are right. If there is a budget there is a constraint. In which case a customer needs to carefully evaluate the propositions to decide which of the ones meets their criteria best. Ryanair marketed competing against other modes of transportation but I think we can put that into the marketing corner. They started up with ‘air travel for the price of ground transportation’ – but let’s be frank: In the cases you choose air travel (and then from a second or third tier airport) with Ryanair there is no suitable other means of transportation that gets me where I want to be in a reasonable amount of time. This might have changed a bit with the emergence of long distance bus routes in Germany at least, although I cannot imagine this being more comfortable 😉
As for Spirit, I, too, applaud their approach. Virgin Australia and Air NZ on trans Tasman routes (between Australia and NZ) have a similar but simpler scheme. You can buy tickets that include different ‘add ons’. But then most of the items of desire (movies, food, drinks) you can also buy on board. I particularly like Virgin AUs idea that created an advantage out of their legacy as a low cost carrier. As the seats do not have video, they created an app and have a movie library on board that you can watch using your own device and the on-board wireless, which they have for quite some time now. It is a low cost thing with high positive impact, similar to the booking experience topic that you bring forward.
Cheers
Thomas
@twieberneit
Bob – I agree 100% that increasing profitability is critical – and should ultimately be the goal of any customer experience initiative. Also agreed that the price-value equation plays a role, and that the Qubit platform is an improvement over Expedia and others. I’m just a little suspect of framing this business initiative in the name of CX.
I guess I think of customer experience being a loyalty-generating construct, with profitability being the ultimate result.
A high-end hotel chain we worked with, for example, re-jiggered their pricing a few years back. They raised the room-rates for corner rooms, with the justification that people who wanted the better views would pay more for the experience. They were right, people did. But was it a customer experience exercise, or a revenue generation exercise? I argued that it was the latter. It didn’t create greater loyalty, only greater revenue.
We encouraged them to test a different model in one of their properties. They raised all room rates by one dollar, thereby capturing the same revenue, then used the corner rooms as a reward for their loyal customers. Their NPS and CSAT rose significantly with their most profitable demographic, and remained unchanged with the rest.
Would Southwest have such a loyal following if they had only focused on the price/value equation? I don’t think so. In their case, it is the fact they added a high level of customer service to it that made it stand out.
Friends, what has price got to do with service. Look at your own experience. Most of the time the problem is not doing the right thing for the customer. Doing the right things do not cost money: smiling, being polite, friendly, helpful, keeping the customer informed in a flight on delays, etc. You do not expect free meals (this costs money) or lounge access (this costs money) from a budget airline.
Let us focus on getting the basics right, and then worry about costly customer based efforts