Unbundling and the Entitlement Trap

Raising prices can be tricky but introducing new fees for things considered to be entitlements can be disastrous.

Airline baggage fees offer those who value the ability to travel with more luggage incredible value (discounts of more than 90% compared to the next best – and far inferior – option) without passing any of the associated costs onto those that don’t check bags... but everybody hates them.

Logically bag fees make perfect sense. There are clearly costs (labor, fuel, etc.) associated with handling and transporting luggage and baggage fees ensure those costs are borne by the people that incur them. Instead of asking all passengers (including those who travel light) to share equally in these costs bag fees means that only those people who value checking baggage pay for (and cover the cost of providing) that service. Most people would agree that you should expect to pay for what you use so this should seem perfectly fair and entirely acceptable.

The prices are also very reasonable. In fact, compared to the alternatives, they are an absolute bargain. Sending a 45 pound bag from New York to San Francisco with a carrier like UPS would cost approximately $75 for 5-day service or almost $350 for next-day service. The typical $25 airline baggage fee, for what amounts to same-day service is, relatively speaking, a great deal.

Everything about baggage fees seems reasonable but do you remember anything that has caused has so much aggravation and ill will among consumers? Why would people get so upset about paying a deeply discounted price for a service they clearly value?

Because a free checked bag was an entitlement. It was always free and people were never taught to value it. And, when charges were introduced, airfares are priced in such a way that nobody ever really saw the base fare go down (if indeed it did).

 

Don’t Set Yourself Up For This Kind of Failure

Anytime that you introduce a new feature or service you may be tempted to offer it free to differentiate yourself. Avoid this temptation – if there is any chance that you might ever want/need to charge for something start charging for it immediately. You can start with a low price and increase it later (it is always easier to raise a price than start charging for entitlements) or, better yet, start with a higher price (that reinforces the value) combined with an introductory discount (to help build demand).

 

If You Have To Start Charging For Entitlements Do It Carefully

The approach depends on the situation. If for example you are a florist and don't charge for delivery you should plan on phasing it in gradually, and show the customer how you are actually dropping (or at least holding) the price of the flowers. If you don’t currently charge for “premium” deliveries (timed, after-hours, weekends, etc.) but want to start then draw very clear lines between your service options.

Exhibits

Cost of Shipping Baggage

Airline Baggage Fees

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