IMD Professor Reacts
Ref: PR038-16


When paying is preferable to free

IMD Professor John Walsh on British Airways’ partnership with Marks & Spencer

British Airways (BA) recently announced that from January 2017 it will replace its free food service with an expanded food range from Marks & Spencer (M&S), the well-known British retailer, on short haul flights. The food items will be priced at GBP 5 or less. Apparently the decision was taken as a result of customer feedback.

What is indeed a small step for the airline industry is quite a large, and uncommon, step for a service provider. Many companies offer free services which are treated with low priority, receive little support and they deteriorate over time. Futile attempts to get customers to pay for the service (who would for poor quality?) leads to further erosion. A vicious circle ensues.

I can personally attest to this; My family and I frequently take a plane trip where the schedule favours a low cost carrier on the outbound leg and a “flag carrier” on the inbound leg. Charged with booking the tickets, I dread the various questions about add-ons and “ancillary services” the low cost carrier tries to sell and appreciate the relatively more straightforward process of the flag carrier.

On our most recent flight, my six-year-old traveling companion made his own brand preferences known as only a six year old can – he wanted to fly one, only, and never the other. Which one?  The low cost option. Why, I asked? The response: “I get the potato crisps I like”.

And, I reflected on the two in-flight experiences. The flag carrier provided a sandwich of questionable contents, a soft drink and coffee or tea – all for free, but apparently a smile from the staff costs extra. Chirpy Team Low Cost provided a relative Aladdin’s Cave of delights, at a price appropriately high given the captive market. While most of the free sandwiches went uneaten or were refused, at least half the low cost travellers chose to pay to eat and drink.

The free service is a cost for the flag carrier and therefore the offering is limited. Doubtless much time and effort has been put into driving efficiency and reducing cost, rather than enhancing the customer experience, given the customer isn’t paying an incremental amount.  As a source of revenue for the low cost player, an attractive portfolio is made available. The time and effort there is spent on figuring out how to maximize the profit from the in-flight service, an objective that means keeping an eye on costs, for sure, but there is no profit if there are no sales, so they also have to make the options as appealing as possible. Simply put: it is free and bad versus expensive and good (or at least, better).

The BA decision is made easier by the fact that some competitors, if not its flag carrier peers, at least the likes of Ryanair and easyJet, are already charging for food and drinks.  Few have the fortitude to be first – to be the first in an industry to charge for a service previously offered for free, and to justify the move with the quality of the offer.

And, an interesting aspect is BA’s employment of an “ingredient” brand via M&S, for surely BA would be capable of outsourcing and using their own brand without having to share more margin with M&S. In this case, as in “Intel Inside” for example, the M&S ingredient brand may provide value by making the offering more appealing in the eye of the customer.  There’s also an added upside for BA. If the customers don’t much care for the food they’ve been served, they’ll hold M&S more to blame than BA.

It is unfortunate companies err of the side of inertia when it comes to reviewing and changing their service offerings. Moving from free to charging for a service is fraught with risk, especially in our interconnected age of social media – online boycotts etc. make decision makers ever more cautious. However, where the economic rationale is there and where customers perceive benefit in an improved offering, even at a price, the outcome can be a true win-win.

John Walsh is Professor of Marketing at IMD and directs Building on Talent (BOT), a program for high-potential managers early in their career looking to take on greater responsibility.


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