Episode #0079 - Can Unbundling Go To Far?

Pricing College Podcast

In this episode of Pricing College we ask has unbundling gone too far.

We discuss the travel and hotel industry - and give the example of Ryanair.

Unbundling can be a great strategy for segmentation - but sometimes we just want the full service!

The more things change the more they stay the same is an old saying. So today we really want to look into it. Whether the recent trends in many areas of business particularly things like hotels, etc. Whereby it used to be all you buy, you pay upfront and you get everything to Bed and Breakfast everything's Included. Same with airlines or travel. Then it moved towards more and more unbundling and deep packaging. And you pass separately for different items and those sort of aspects. So we want to dig into that day today and ask, has that reached the maximum? Is it swinging back the other way?

I mean, we do see a lot of trends for bundling things and then unbundling them. I just wonder if these are trends driven by data. A scientific approach to the market. Whether businesses are in a way either guessing or chance in their own to get and to boost revenue. But I think the problem here is if you don't do unbundling strategically, very much like bundling offers strategically. What will happen is, yes you may boost revenue in the short term. However, over the mid to long term customers get annoyed. They want the full offer. And it starts becoming just a bit of hard work to buy from businesses such as let's think about airlines unbundling even the food that used to be bundled in the offer. Used to know where you're going to sit. And then after a time, now you don't know where you're going to sit on allocated seats. It just becomes an awkward customer experience. It's just a bit annoying, and customers really don't like that. And now this is why there's an emphasis on customer experience. Part because of the unbundling issue that we're speaking about. So yeah, like we've got to think about not just the short term effects. But the longer-term effects of unbundling offers.

So let's first dig into, why companies do unbundle things? In many ways, it's a sensible pricing strategy. It aligns with many things that we've spoken about on this podcast. Whereby you want to segment your market. Rather than you just selling one ticket and everyone paying the same price for the ticket on the boat or the plane, you can choose to differentiate. You can pay for seating extra. You can priority boarding extra. You can do 50 to 100 different types of access, excess baggage. You're going to fit different meals. You'd have different entertainment. So it can be a very different experience for people on that flight. And that makes a lot of sense. It really is what we've spoken about in so many aspects of the show. When you look at it, the companies who have done that, the airlines who have done it are more profitable and are more sustainable. They haven't gone through, how many bought other competitors? Were going to people like Ryanair, Southwest Airlines, etc. Which we're pretty confident will bounce back when COVID decreases or declines. But the thing is, have they pushed it too far to the point where people are just, is there a happy place? Is there a sweet spot that after you go past that it just gets into the area of gouging? There are consistent rumours that Ryanair will even charge you to use the bathroom on flights. And these sorts of things are rumours. But they highlight that people have a breaking point and where that breaking point is who knows.

Yeah, that they are rumours. But I think by unbundling too much Ryanair has set a tone of they're basically saying like, expect anything from us. Because we may charge for separate items. We may charge you for the toilet. They never say we're not going to do it. It's always on the agenda and it's almost for the consumers. It's a risk for them to then even go on the flight because you just know it's just going to be an awful experience. You're not going to enjoy it. It's like grin and bears it. It just goes from A to B but those are the sort of people they're attracting. They've done the research over the years. And they know that the price-sensitive audience for their particular offer airline has been very successful. So in a way you get what you paid for. If you want more you pay more. That's the overarching strategy and messaging from Ryanair. They're like if you want to pay more go somewhere else, but this is what you're going to get from us. But I think over time people even have been surprised by how difficult it is to fly with Ryanair. Just the experience has been quite shockingly bad. So maybe as Aidan said, there is a sweet spot. Maybe they're moving back to offering a bit more value at the ticket price than before. But yet again, it goes back to understanding your market before making any immediate price changes or changes to your offers. Is there something else that we could be doing other than just bundling unbundling offers?

I think we go with the airline industry. The Ryanair example is really an extreme example of it. Partly because of the media coverage but it leads to the customer service aspect of it decreasing. Whereby you get to the position where you don't think you can ask for anything or your any complaint or problem. You're pretty sure it won’t be solved. You're pretty sure that if it's not in the legal terms or conditions, they will not go above and beyond to solve your problem. So realistically the customer service, it's almost like advertising or signalling to you that the customer service is going to be low. If they can wiggle out of providing you with a solution to your problem they will. Whether that is correct or false that's the way many people see it. The other point I'd like to add is, you look at the hotel industry where the classic is breakfast included. If you're looking to book a hotel, you know your breakfast will be there included. I would assume the vast majority of people specifically on holidays. Maybe business travellers are a bit different because you're a bird in the morning with a specific task for the day. But if you're on holiday, with family or a couple of whatever it is. In most cases, you want breakfast in the hotel included because it's convenient. You don't have to stretch you don't have to bring your wallet with you unless you’re tipping. Those sorts of aspects so it's nice and easy. By the hotels charging the breakfast separately. I'd like to look at the numbers from some big hotel chains and see how that does. How does that impact? Does separating the breakfast actually decrease room sales? Should the breakfast almost not be a loss leader in some aspects? That if you might be loss-making on them or even just breakeven. But you're keeping people in the hotel, you're getting booked more rooms, you're making them happier. Fundamentally, do you not want people to be in the hotel whether they booked a tour with you. Or grab a coffee or whatever it is or maybe pay a bit of an extra. I sometimes think by pushing people away with a reasonably high-cost breakfast. You just push them to a cafe around the corner which will probably be half the price. And then for the rest of the day, they're going to do other stuff and then won’t come back and they won't spend in your store. I'd like to know I'm sure that hotels have thought about it. But I would like to know, is there a loss leader aspect to that and what is the thought process?

On that, I've seen the hotel sorts of five-star hotels do exactly the same. Having different price points on the hotel website versus an aggregator site. Like what if and on what if maybe you'll have the same hotel. Showing the unbundled price for breakfast, versus a bundled price for breakfast for the same hotel. But the fixed price of the bundled price is very high. I think it's almost too high cause it's not compelling you to buy that. Like the total bundle versus the unbundled option which is equally as expensive and inconvenient. So overall, I think from what I've seen so far, the channel pricing is an issue. The understanding of why people buy it is still an issue often. Some hotels I think they haven't got the optimal pricing. My suspicion here is that it isn't driving profitable revenue growth. I think it's still might be still more on the testing or guessing phase. I think a bit more work can be done there.

We often talk about strategy versus tactics and these sorts of things. Sometimes I think we can be too focused on the up-close. It's almost the old Shakespeare thing, “you can see the wood for the trees”. And maybe what you're doing is you're getting those extra dollars from that breakfast here and there and you can count and allocated etc. But, are people not going on your flight, your boat, your service because of that? You just have to look at it, people love all-inclusive. They seem to love them. They do consume more certainly for the first few days until they get bored of that consumption. But at the end of the day, people love cruise ships. People love all-inclusive holiday resorts. Because it literally means they can switch their brain off and yeah, they're there. And when you're there and then you don't leave the resort. You buy extras such as the tours, the trips, the massage, it's those sort of things that you did pay extra for. So it's you got to see things in the hole in the entirety of it. Sometimes when you're always looking at the exact detail maybe you miss the big picture.

Yeah, I think that's right. I think if you look at different price options, bundling, unbundling as simply as different options that people can select without thinking about the context. The context in which they buy. How they've come to you? How do they consume? Going on holiday, what is it that they want from this holiday? How will that change their behaviour? How will that change their mindset? And how do they consume products? The perception of price points in different contexts. This is essentially where you start with bundling and unbundling. It's not the other way around. It's not simply just an option in a spreadsheet. And then you tick with the price points, which I still think a lot of even in tourism and airlines, it's still about that. And I think people forget the critical key source of pricing power, which is all about customer usage and consumption patterns.