Why the Airlines Created Premium Economy to Solve a Pricing Problem

By Brett Snyder

Brett Snyder is the author of the award-winning airline industry blog, “The Cranky Flier," and president and chief airline dork of Cranky Concierge air travel assistance, for which he has been named one of the Top Travel Specialists for the past three years by Conde Nast Traveler.  He is a contributing editor for PlaneBusiness and he writes for both CNTraveler.com and the Intuit Small Business Blog.  Snyder previously worked in pricing, marketing and strategy roles with several airlines, including America West and United.  In 2005, Snyder created the travel search site for leading comparison shopping company PriceGrabber.com.  Snyder graduated from The George Washington University with a bachelor’s in business in 1999 and Master of Business Administration from Stanford University in 2004.

Part of having an effective pricing strategy is ensuring that you have the right products in the market to cater to interested consumers.  This might sound like a startup issue, but it's not.  Product and pricing are constantly evolving, so ongoing reviews are very important.

One needs to look no further than the airline industry to see an example of how the product offerings have evolved.

Initially there was only one class of service, and it was expensive.  Travelers were treated well (or as well as possible flying small, slow airplanes for hours and hours on end), and they paid for it.  But eventually the airlines began to realize that there was real opportunity at a lower price point.  Coach travel was born.

Initially, the difference between coach and what became First Class wasn't all that different.  And the pricing reflected that.  But as countries moved toward deregulating their airline industries, pricing diverged dramatically.

In the US, coach prices plunged as airlines raced to add capacity and serve this growing demand.  First Class prices, however, stayed high.  They were meant to cater to the original air traveler who wanted a superior experience.

In the intercontinental market, the price differential became so great that eventually a middle tier was introduced.  That was Business Class.  Business Class was created as a way for travelers to get something better than coach without having to pay the many multiples above the coach price to sit in First Class.

That lasted for some time until the same trends from before took hold in the new three-cabin environment.  Many airlines decided to remove First Class or shrink the First Class section while improving their Business Class product, hoping to take traffic from those who flew First Class on competitors.  When British Airways and Virgin Atlantic introduced flat beds in Business Class more than a decade ago, it was the first shot fired in a race that would make flat beds the standard.

First Class became something for the super rich with small, intimate cabins on fewer and fewer flights.  Business Class continued to be a premium product but one that was at a price point that could appeal to more people.  At the same time, coach prices continued to plunge in inflation-adjusted dollars.

The result was yet again a massive divergence between coach prices and the next class up.  How could this conflict be resolved?  The airlines began introducing another class.  This has manifested itself differently in the US than it has elsewhere.

In the US, airlines have simply increased legroom in a few rows at the front of coach and they sell those for a few dollars over the coach fare.  But around the world, airlines like ANA, Japan Air Lines, Air France, British Airways, and, just recently, Lufthansa have introduced a truly new premium economy class.  

[Lufthansa link: http://www.lufthansagroup.com/en/press/news-releases/singleview/archive/2014/march/05/article/2828.html].

Now if a flight from the US to Europe is running about $1,000 in coach, $6,000 in Business, and $9,000 in First, there is now a premium economy option in the $2,500 range.

Having products that fill in the gap like this become important because they provide a real upsell opportunity for the price-conscious consumer who also values a premium offering.  For the airlines, Business Class had become too much of an upsell to tempt the average coach traveler.  But premium economy provides the right product at the right price.

Please Don’t Make Me Think

Keeping Promotions Simple

Laura Iles - Senior Consultant, Integrated Insight

My favorite grocery store runs a weekly ad, Thursday through Wednesday. It took me a little while to remember that the ad doesn't run with the calendar week, but I grew accustomed to it quickly enough. The challenge is, the store also gives out coupons in the flier. Coupons that run through Sunday.

Interestingly enough, it’s often the same coupons from week to week, but they are only available half the time. If I want to take advantage of the sales pricing and the coupon, I now have a 4 day window each week to do my shopping. 

I never remember in time. I can’t tell you how many coupons I've thrown away, sadly unused.

A friend who used to work as a cashier at the store rolled his eyes when he saw the most recent coupon. “Oh yes, and come Monday, half the customers will come in and try to use that coupon, since it’s a weekly flier. Explaining why we would put out coupons with different dates than the fliers they are in was always a treat.” 

I thought about that for a minute, relieved that I wasn't the only one who had made that mistake. “Why would the store do that?” I wondered. “They’re just making it harder on everyone.” 

For every customer who tries to use an expired coupon, the manager either has to honor an out-of-date offer (in which case, why limit it at all?) or risk upsetting the client. That’s a losing situation for someone, no matter how it is resolved. And it slows down the checkout process, frustrating other waiting customers. But still the out of sync promotions keep coming, week after week. 

Certain offers need to be fenced, and consumers understand that. But, why is the store running the promotion in the first place? Perhaps it’s driving incrementality, keeping the store front-of-mind, or rewarding longstanding customers. No matter the end goal, if the offer is confusing enough that half the customers consistently misunderstand, is it really driving behavior the way it was intended to? 

So please don’t make me think. We’re all on information overload, and for many of us, we just aren't interested in expending additional mental resources on a company’s promotions. The design team can emblazon “4 DAYS ONLY” in capital letters and bold typeface at the top of the coupon, but when it’s buried in a visually busy flier, it’s still easy to overlook. Online, in print, on TV – we've all learned to tune out the clutter. 

If it isn't necessary, don’t complicate the promotion. Run the coupon for the full week, but don’t run it every single week. Or put out a special insert, separate from the weekly flier. I’ll happily try a new product or buy extras of something if you give me a coupon – but not if I have to rearrange my schedule for it.

This store is not a discount store and, like most of the regulars, I am not an avid coupon clipper. I pay a little more for the service, the selection and the convenience. When promotions are out of sync with each other, it muddies the waters for the customer, which in turn makes work more difficult for the front-line employees. No one wins in that scenario. Whenever possible, keep it simple.