Lessons from Disney on how to apply the ‘rule of three’
Sep 30, 2013
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How can ‘distribution’ best support pricing, is the question posed by EyeforTravel.com guest columnist, Tom Bacon in this exclusive article. It is a question you may well ask, and it may just be that one of the world’s biggest names in entertainment has lessons for the airlines.
A pricing guru advises that you should always offer three choices in order to maximise revenue; in addition to the lowest priced product make sure you offer a few sell-up options. Conceivably, each channel - sales, e-commerce, reservations, and others – should consider ‘the rule of three’ as they strive to maximise sell-up with their customers.
In fact, airlines that have implemented ‘branded fares’ on their websites now do offer three choices. In economy, each airline offers a ‘bare bones’ fare and two sell-up alternatives:
|
Airline |
Lowest Fare |
First Sell-Up |
Second Sell-Up |
Example 1st Sell-Up ($) |
Example 2nd Sell-Up ($) |
|
American |
Choice |
Choice Essential |
ChoicePlus |
$30 |
$10 |
|
Air Canada |
Tango |
Flex |
Latitude |
$100 |
$400 |
|
Frontier |
Economy |
Classic |
Classic Plus |
$30 |
$30 |
|
Porter |
Firm |
Flexible |
Freedom |
$100 |
$100 |
Although each of these airlines has its own view of price elasticity and optimal bundling of ancillary services – and thus there are some dramatic differences in the fare upsells among ‘fare families’ – each displays three such bundles as opposed to two or fifteen.
o The range of upsell philosophies reflects the fact that airlines now offer so many ancillary services so that they could, effectively, offer dozens of different bundles with upsells from $10 to $400.
o Each airline, in any case, has opted for simplicity – accordingly, they each offer only three pre-bundled packages of attributes.
Each of these airlines offers three ‘generic’ bundles across their networks. Each display the lowest available fares -- that presumably appeal to the most price sensitive passengers (Economy, Choice, Tango and Firm) -- and then they each also display multiple upsell bundles – up to $500 more than the base fare.
The ‘generic’ approach to bundling, that they’ve each adopted, generally separates business travellers, who value certain amenities and who are less price elastic, from leisure, who can be highly price elastic for their next discretionary trip.
In fact, with three such generic ‘bundles of features’, each of these airlines is able to target three different classes of price elasticity/service-intensive customers.
How Disney differentiates
Perhaps even more so than airlines, Disney Vacations has a plethora of options for customers. Disney offers a variety of park experiences, each park has different resorts, each resort has different room types and ancillary services. In addition, customers can stay one day, three days or seven days. There are literally hundreds of combinations that are designed to appeal to different customers/segments. Their portfolio was built to cover every possibility and every price point. The various options can appeal to the most price sensitive family and the least price sensitive – and virtually everyone in between.
However, if you call Disney to investigate options, they will give you three over the phone!
Does this sound familiar? Disney, like the airlines who offer ‘branded fares’, believes in ‘the rule of three’ in distribution.
The goal of the ‘rule of three’:
1. Make a Sale! Ensure you have an attractive price point and package of services that is likely to be attractive to the customer. In a generic mode, as the airlines have adopted, this means offering a low bare-bones fare that is generally competitive with other airlines’ lowest fares.
2. Get an extra $1, if possible. Offer a few sell-up bundles that recognise that the customer may value certain ancillary services enough to pay more than the base price.
3. Make it easy for customers to get the package they want. Rather than overwhelm the customer with all of the various permutations of ancillary services available now, pre-package the most highly valued options in new bundles. Make the price/service trade-off as transparent as possible.
Despite the adoption of the ‘rule of three’ by both airlines and Disney, however, Disney employs quite a different philosophy in constructing the three options offered. Disney bases its options on individual demographics, etc.
* This is much different from the three ‘branded fares’ offered by select airlines! Disney offers a different group of three options to different people! They offer three choices, but those choices are customer-specific! They do not rely on ‘generic’ bundles but instead offer bundles more customised to the individual.
Point to note:
Airlines’ ‘branded’ fares utilise the ‘rule of three’ in a generic way while Disney Reservations applies the ‘rule of three’ in a highly customised manner.
The airline ‘branded fare’ solution is, of course, much cruder than Disney’s more customised approach. Rather than offering everyone the very same three options, airlines would do much better to design options that reflect the traveller’s particular demographic or customer type. With the dramatic increase in ancillary services, airlines are approaching the ‘hundreds of choices’ that Disney has and, as with Disney, it is getting too complicated for many travellers to absorb.
For airlines displaying three such options generically to all travellers does not exploit customer segmentation as effectively as Disney does. Of course, savvy travellers can ‘have it their way’ and separately select certain sell-up features but, ideally for the customer and for the airlines, airlines would offer a customised ‘three’ that are most likely to meet his particular needs.
For a family of four travelling for vacation (who will carry their own bags and who are projected to be very price sensitive):
No frills base fare $100 ‘no-frills’ fare per seat
+Seat selection +$10
+Meals/video +$15
For a business traveller travelling alone (projected to be very service intensive):
Fully refundable/fully changeable $400 ‘full fare’ per seat
+Big Seat +$100
+VIP Airport Experience +$100
There is considerable revenue upside as airlines become more sophisticated with customer choice. And, by offering more customised bundles of services, customers will find it easier to find the bundle that works best for them. As ancillary choices expand, it is even more important that travel suppliers continue to apply the ‘rule of three’ – but that they move away from crude generic packages.
By Tom Bacon, former executive at five different airlines and industry consultant in revenue optimisation. His views are his own. Questions? Contact Tom at tom.bacon@yahoo.com.