The term price obfuscation describes the practice of requiring effort to determine the total cost of an offer. Price obfuscation exists all around us, from shipping and taxes quoted separately to member rates and customized offers. The economics Professors Ellison have written extensively on the subject, from early internet purchases right up to today (see Pathfinders: Price Obfuscation, elsewhere on the site).
Airlines can use price obfuscation for the benefit of all of their stakeholders, including customers, employees, and owners.
Airlines can use price obfuscation for the benefit of all of their stakeholders, including customers, employees, and owners.
The benefit comes from helping customers to escape the misleading perception that all airlines are the same, and that price alone should determine the customers’ purchase decision. Using price obfuscation, airlines can assist customers by slowing their rush to choice, allowing the customer more opportunity to consider and interact with the airline, and offer the airline more of an opportunity to manage their offer and to allow customers to help set their own prices.
There exists the false belief inherent in some discussions in and around the industry that airlines’ offers are mutually interchangeable and one airline could be replaced by another airline without the consumer being aware of any difference.
In economics, we use the term fungible, coming from the Latin phrase for “serve in place of,” to describe goods or services that can replace one another without any difference to the consumer. Airline leaders and media generally speak in terms of commoditization as a trend pushing airlines to become wholly indistinguishable from one another. It’s a little more metaphorical and evocative than the economic term. Commoditization conjures up image of actual commodities, like grain and soybeans. However expressed, the concern is that customers and consumers may perceive all airlines and their offers as identical.
Sadly, there’s an element of Borgesian reality to the belief. If customers act as though airlines are fungible for a sustained period of time, airlines may, in fact, come to be commoditized. Because customers will make purchasing decisions based on the belief that airlines are fungible, and are therefore based only on price.
If the only difference is price, airlines will lower their price. If airlines must lower their prices, then airlines must lower their cost. And, eventually, the constant reduction of cost will impact not only on any sort of differentiation. The cost cutting will impact the basic level of service customers expect. And the downward pressure on price will eliminate any economic rents, reducing the airline industry’s already low margins, preventing investment, and stagnating the business. The Airline Economist won’t opine on how far the industry has already slipped down this slope.
There’s a cause for this commoditization, and it’s got a lengthy legacy. But there’s also a bright future.
Historical cause
Who is responsible for leading customers to think that airlines are fungible? In no small part, it’s the airlines themselves. Via the GDSs, for decades airlines have stacked their offers against other airlines based on departure times, connections, and price. And nothing else.
As the airlines themselves communicated their offers blended with other airlines’ offers to travel agents, and then to consumers directly via OTAs, the airlines created an environment where only schedule and price needed to be considered.
Airlines created an environment where only schedule and price needed to be considered.
And for the customers, especially when that customer is also the consumer, it’s very difficult to measure and compare the experiential differences being offered by different airlines. Unless the customer were a frequent traveler, they may not have a sense of the level of service offered by any given airline. Without a practical means of assessing the service provided, but with an easy comparison of price, it’s only human nature that customers based their decisions on price.
And the airlines responded rationally by undercutting their competitors’ prices. To fund the lower prices, airlines cut costs
If you’d like to pay for a slightly better experience… how could you?
A bright future
A number of factors are converging in the airline industry that should give hope to all stakeholders.
Low-fare airlines have led the way to a pricing structure whereby customers can choose what elements of the flight they’d like to pay for, and which they would not. Although some airlines new to the game haven’t really applied economic thought or marketing acumen to how they manage and present low-fare offers, other airlines have got it down to a science. Expect to see the concepts behind this pricing structure proliferate around the world. This pricing structure:
- creates options for customers to participate in their final price, being the sum of the base fare and whichever options the customer values;
- creates many possible total prices from a single base fare, making the destructive downward spiral of undercutting prices and price wars difficult to initiate (which price does an airline match?)
- enables, and forces, customers to engage on what they really value from a flight… rather than simply be sucked into the pit of choosing on fare alone;
- combines these elements to allow well-run airlines to increase their margins from historically anemic to healthy.
In addition to the pricing structure, enhanced media and even Virtual Reality and Augmented Reality allow for in-flight conditions to be simulated before booking, allowing for a better appreciation of differentiated products for those customers who care.
And finally, the distribution of offers via NDC breaks the tight constraints of traditional GDS filings, allowing airlines to express these varied offers and media to channels beyond their own websites.
From pricing, presentation, and placement: offer management, better display, and NDC combine to bring applied economics back to core marketing concepts. And by engaging customers beyond price alone, airlines can differentiate their offers, provide a more appropriate service, and enhance their margins for the benefit of employees and owners.
The Airline Economist 