Wide Angle

Steven Levitt and Stephen Dubner are back with a second installment of the ‘freaky’ thinking that has now led them to advising would-be suicide bombers to buy life insurance. Over multiple plane rides last week, I scanned through SuperFreakonomics but was struck by one quote in the chapter on apathy vs. altruism: “People are people, and they respond to incentives.” Combine that with their analysis of unintended consequences – “among the most potent laws in existence” – and you begin to see why many marketing schemes fall short of perfect. Let’s take the example of the airlines and baggage fees.

I’m an airline junkie. George Clooney’s character in Up in the Air hit a little too close to home. But suppose you’re a leisure traveler now subjected (as of today) to a $25 one-way charge for your first checked bag, and a $35 one-way charge for your second. You may call this a fee, but the airlines call this ‘ancillary revenue.’

From the airline’s perspective, the logic here is simple – collect additional revenue from an activity the customer already does. Yet people respond to incentives, and the incentive here is clearly don’t check a bag. How about those unintended consequences? Passengers don’t check bags; suitcases get larger; security lines back up, overhead bins fill up faster; gate-checked luggage increases (where there is no penalty for checking those bags); on-time departure decreases; upset business traveler who followed the rules misses his meeting.  The customer behavior change is easily predictable in this instance because the penalty is large enough, yet the unintended consequences and negative externalities abound.

But ultimately, here’s the question – does it work?  Not even close. Check out Joe Brancatelli’s analysis here. Ancillary revenues are great, but how about top-line revenues, the ones that count? The only major airlines to avoid double-digit revenue declines in 2009 are the two that do not charge for the first checked bag (Southwest and JetBlue). Account for the fact that a greater percentage of the top line is coming from non-ticket sources, and you see that the bottom has dropped out for most of the major hub-and-spoke carriers. People respond to incentives whether we like it or not.

After a year of upheaval in 2009 where many struggled to stay afloat, marketers must remember the simple truths of consumer economic behavior:

• Do our businesses account for different scenarios if A occurs rather than B?
• Do we understand both the rational and emotional incentives to which consumers respond?
• How has social media changed the incentive structure for our consumers?

Members, join us for a webinar on January 28th on recession-era insights you can’t afford to forget.

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1. Hello, Marketers? Remember Me? I’m Your Brand