I have this crazy theory that people love free stuff. The only problem is that stuff isn’t “free” often enough.
Take for example any regular US plane flight. Normally if you fly coach the airline charges you a $5 fee for a bottle of beer, where as soda and juice are free. Since this is the cultural norm people don’t think to much of it. Yet when airlines do give you something free (drinks in this case) people always seem to comment on how AWESOME it is to get something “free”.
One flight which does give these free drinks is the Delta shuttle from Boston to NY. On this flight every passenger of the appropriate age is offered free beer in addition to the regular options of juice or soda. This flight may be a little unusual that it caters to a heavily business focused crowd (where it should be noted that individuals often have a company paying for their flights), but none the less drinks are still “free.” When I say “free” in this case its I mean that the airline must just be passing the extra cost of these drinks directly on to the consumer in the ticket price. But is that really such a bad thing? I love the fact that Delta offers this free drinks service because it differentiates this flight from most other cost cutting routes.
Thinking back to a marketing class I took last semester I remember a discussion on consumers relative price elasticity. The lecture focused on a behavioral economics idea that people have an irrational focus on relative levels of pricing when a truly rational person would only be concerned with absolute price. Take for example the difference in purchasing a soda and a car. These may seem like completely different purchases but stick with me for a minute. If we say that normally a soda costs $1 and a car costs $20,000 we can see there is a huge difference in price. Now lets say the price for a soda is $10 and the price of a care is $20,0009. Very few people people would be willing to pay $10 for a soda (a $9 price difference) where as the same absolute price change in an expensive car means little to the consumer. In either case the consumer is deciding whether to spend an additional $9, but since the soda represents a 1000% increase in price the consumer is not willing to spend the extra money.
This directly relates back to the earlier airline beer example. I always say no to the $5 airline drink, but would be much more willing to pay $5 more on the price of a $300 plane ticket to get this kind of perk. It’s the same $5 either way, but relative to the cost of a plane ticket, $5 doesn’t seem like that much money. Which is a perfect example of me thinking irrationally!
Including “free” stuff in the price of a ticket already happens in first class. The first class overpriced tickets come with cookies, warm towelettes, drinks and many other amenities, but the problem is that for most people the price of a first class ticket far exceeds their budgets. And then why is there a first class? It’s a way for the airlines to segment the market. It’s away to figure out who is price sensitive and which travelers can afford high class service at any price. It’s the same reason that people on airlines pay different prices depending on where they sit, when they book, or how they travel. So then the original idea of stuff for “free” gets a little more complicated because charging for extras is just another way to segment the flying market. It is the airlines way of figuring out which person says, “I want the cheapest flight with no frills,” verse the individual who wants a cheep ticket then decides that they are on vacation so “what the heck, I’ll take that 5 dollar beer.”
So then if you can’t ask people if they want to pay additional money for a beer then how do you figure out who will pay extra? The answer….don’t worry about it!
It appears that drinks for purchase should do a perfect job of signaling which individuals would be willing to pay the extra $5 for a drink. Yet we already know that people are not totally rational when it comes to relative prices. It’s likely that people would have a more enjoyable flying experience if the nominal additional charge was included in the bill for this extra amenities. A bottle of beer costs like $1 to buy in bulk where as a soda is like $0.25. Since a beer and soda probably have very similar handling costs once the product is purchased, it seems completely reasonable to charge me $2 more on a ticket to make me think “Wow, this airline just gave me a ‘free’ beer, where as most other airlines charge $5…I really like this airline!”
The last thing (I know this post somehow got way long) that comes to mind on the topic is that so far I’ve only been discussing the specific example of alcoholic drinks on a plane, but this line of thinking could be applied to so many other areas of business. Sticking with the plane example, maybe the airlines could do something where passengers are charged an additional $2 on the ticket and airlines provide warm cookies to those passengers which do not want to drink. This should make people think that they are getting “free” stuff and works to not unfairly overcharge individuals who can’t/don’t take advantage of, in this example, the provided drinks. Or instead look at business which provide employees with food or drinks throughout the work day. I have friends working at companies that provide “free” dinner if you work late, and I have also personally worked at two companies which had fully stocked kitchens for employees to enjoy during the day. Instead of only offering coffee and water, these companies provide an extra service which employees covet. Obviously the money is coming from what could be sightly higher profits at the end of the year, but if your company is doing 1 billion in revenue wouldn’t you rather spend 20 thousand dollars a year on happy employees who actually like coming to work? Its a trade off, but in many cases I think companies focus too much on cutting costs without realizing what small “free” things can do for moral or reputation.
I DON’T want companies to go overcharging me for tons of extra things, but there are many situations where they can give me something “free” and I will love it…probably without even realizing that I am paying for it.
