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The discussion around offering unbundled pricing is much like deciding whether to serve an a la-carte menu or a standard buffet with pre-decided food items at a fixed price at one's restaurant. The first, a French phrase, means 'according to the menu', under which the visitor is charged for each item that she chooses to go with based on that item's price. An all-you-can-eat buffet, on the other hand, simplifies matters by giving her a start to finish meal for one consolidated price. Obviously, the conversation does get a little more complicated when you put this in the context of the pricing strategies for larger multi-location businesses. And if you have been following the conversation around unbundling of prices in the aviation and in the hospitality industries in India today, you would know that pricing decisions will be trickier than ever before.
Price unbundling is not completely new to either of the sectors though. Low cost carriers, or budget airlines as they are known more popularly, unbundled their services long ago. The trend caught on even with the not-so-low-cost airlines, indicating a certain consumer comfort with the concept. Now, with an official diktat - the civil aviation ministry permitted scheduled airlines to unbundle certain services and to charge fees for these services separately in April - airlines find a lot more room freed up to unbundle their prices.
The practice of unbundling has been tested thoroughly in many global markets. Such services are referred to as unbundled flight products and attract a la carte pricing. At one point European airline Ryanair even floated the idea of charging consumers for using toilets on board. The idea caught heavy flak. The company went back on its stand, but pressed on with reducing the number of lavatories on the flight, freeing up space for additional seats, all with an eye on reducing the base fare.
Is that the benchmark to follow? Or does this example point to the place where airlines need to draw the line amid the shifting sands of customer service? Going by the reactions to the Ryanair proposal, one could say, quite confidently, that this is as far as you can stretch things as a service provider.
A matter of choice
The strongest argument in favour of price unbundling from a consumer standpoint is that it allows for transparency in the transaction. She knows exactly what she is paying for and can weed out the excesses to suit her requirements. However, there may be certain aspects to your service that she considers implicit in your promise.
Consider the case of airlines once more. They may charge the customer extra for seats close to the emergency exits or those in the front rows because they offer extra legroom. The customer sees the value in it and chooses to pay for it. But can you charge the customer for getting a bunch of seats together while travelling in a group? Possibly not. She would consider that a nuisance, a thorn in the flesh so to speak that takes away from the joy of travelling together.
In other words, you would be taking away the choice from the consumer and vesting it with the company or the brand.
Consider the case of selling food or drinks to her instead. Most travellers don't mind paying for the food once on board. Increasingly, however, she can also buy food of her choice before boarding the flight and pay an amount that's bound to be lesser than what she would have paid once on board.
The operative word here is 'choice' or the lack of it.
This thought finds an echo even in the hospitality sector, specifically the budget hotel segment. This sector is already an active user of the concept of unbundled pricing. But even in this segment players have found there are things they can do and get away with and there are things that are strictly a no-no. The airline companies grappling with new pricing models may find some clues as to how best to unbundle prices from the experiences of some of the players in the hospitality segment.
Accor Hotels' budget brand Formule 1 is one such player. The chain's core promise constitutes of a good sleep experience, running water and electricity, and a safe and secure environment. Most else come at an extra cost. Philip Logan, vice-president, Formule 1 Hotels India, says that as long as the brand can deliver on this promise, it can charge for all the extras. He shares the example of tea/coffee makers in the room. Most hotel users take this service for granted. But providing this option adds to the running cost of the hotel - the entire paraphernalia of coffee makers, tea bags, coffee and sugar sachets, possibility of stains on bed sheets, washing of glasses etc comes into the picture - and is almost inevitably passed on to the consumer. The hotel addressed this issue by putting vending machines in the corridor. All the customer has to do is walk up to the machine and pick her drink at a basic price.
Logan says that the customer wants the power of 'choice' to rest with her. She wants tea or coffee in the morning, but not necessarily in the room where she is staying. As a business, your job, therefore, is to focus on understanding the completely stripped down version of your service that bares your very core to the consumer's favour or ire. And then you should deliver on that promise while also ensuring that your customer doesn't feel isolated, stranded or helpless, says Logan.
Also, almost paradoxically, in the case of a no-frills experience, the basic service must be of fantastic quality, says Dhiraj Mathur, executive director with PWC India. The on-time arrivals and departure, the knowledge and courteousness of the staff, cleanliness and hygiene of the aircraft are factors that are essentials that must be focused on. He cites the example of IndiGo that is almost a case study in good flying experience in the industry today.
Given the relative novelty of price unbundling as a concept, businesses must be sensitive to an already established understanding of service by the consumer. For airlines it could be no charges for check-in luggage while for hotels it could be provision of safe drinking water, say experts. "Indians are used to travelling with substantial luggage and they may feel the pinch if they are charged for checking in the luggage. One needs to move gradually in that direction. For instance, luggage allowances have been brought down steadily across markets globally over the years. That may be a good start," says Mathur.
| How to unbundle price successfully |
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Rebundling the prices
Another trap with unbundling is the risk of a certain dissonance creeping into the minds of consumers with the price quoted and the amount eventually charged, after all the 'compulsory' extras are taken into account. Take the example of the auto industry. The ex-showroom price of a vehicle is just an indicative price for the consumer, who almost subconsciously ups the tag by 10-20 per cent, and feels let down a little each time.
Wouldn't it be better then to simply provide a consolidated figure? That is the basic germ of thought behind the call for rebundling of prices that many international carriers are facing today. Globally, aviation is moving in the bundled pricing direction, where consumers can choose from a set of pre-packaged deals. Like in the case of prix fixe meals that many international hotel brands offer, where there are a certain number of courses offered at a fixed price, and you may be able to choose from a few items for each course.
Some marketers also say there is a peculiar consumer psychology at play that makes pricing decisions something like a tightrope walk. Keeping this in mind, a marketer would rather price the hotel room at Rs 1,200 per night and give a bottle of mineral water for free than claim Rs 1,000 as room tariff but charge an extra Rs 150 for a mineral water bottle.
So which is the best? To go back to the a la carte versus buffet analogy, it simply depends on how you like to eat. A la carte pricing is probably best if you aren't a big eater, or even enjoy ordering several appetisers as your meal. Similarly, if you don't use a hotel towel or television, there is no reason you would want to pay for it. You are happy when you can pick and choose the items you would like to order and pay for them. On the other hand, a buffet may be your best bet if you enjoy having a range of items during a meal and don't want to be bothered about how much each one costs individually.
In other words, the solution could be customisation. Like Roots Corporation's Ginger Hotels has done. It offers corporate travellers a wi-fi plus breakfast as a package whereas families get discounts on laundry or subsidised travel options.
