CNBC Business | “SORRY, THAT’S EXTRA”

“SORRY, THAT’S EXTRA”

The pay-as-you-go pricing model made famous by no-frills airlines is catching on… even consumers are learning to love it, says Jo Bowman

Everyone bristles at it, but deep down it seems we’re starting to enjoy the Ryanair way of doing business, and it’s catching on. The principle is that for a low headline price, you get a very basic service and absolutely nothing else. Want more? No problem, but it’ll cost you.

James Murphy, a director of The Future Foundation, a London-based consumer and business trends think-tank, says that for many industries beyond airlines, this “incidentalist pricing” is the way forward.

“This is an idea whose time has come,” says Murphy. “Once you could expect to be offered one price and it would be ‘take it or leave it’, and when we all did economics at college we were taught about supply and demand creating a price point.

“Clearly, in many areas, that principle has gone, and companies are finding ways in which to charge us as consumers for things that were once rolled up in a package.”

Richard Cope, director of foresight at market research giant Mintel agrees that giving consumers choice about the price they pay and the exact product or service they want is the way forward. “Charging for extras can and will translate more and more to other sectors. It’s crucial to give people a choice.”

The budget airlines Ryanair and easyJet have become synonymous with incidentalist pricing; Ryanair alone was thought to have made around €715m in 2009 through charges for baggage, booking and checking in – things that used to be part of the price of a ticket.

Flag-carrier airlines are also adopting the ‘you get what you pay for’ mantra. British Airways now charges passengers who want to select their seats more than 24 hours in advance, while Qantas is charging for extra legroom of seats in the emergency-exit rows. Japan’s All Nippon Airways has recently announced it’s going to offer economy-class passengers the option to buy the meals that the folk in business class get as part of the ticket price. Premium quality meals, with wine or saki, will set you back an extra 1,000 yen (€7.50).

There is no shortage of pricing ingenuity on the ground either. In the US, mobile phone network AT&T has begun charging customers a fee for paying bills in cash in-store. Universal Studios in Los Angeles charges $69 (€45) for a regular day pass, but $104 (€70) if you want a Front of Line Pass that jumps the queue. Meanwhile, several airports are planning to offer passengers the chance to buy a place at the front of immigration queues.

If that makes you feel slightly uncomfortable, consider this: in London, one local council, Barnet, recently announced that it will charge householders less per year for a slimmed-down basic service, and bill them for the extras they use. Barnet says the days of a “one size fits all” council have gone. Extra charges could include a bill for families that don’t recycle enough or a fee for express planning applications.

So, what might be next? Extra for milk in your coffee? Sugar? A charge for a paper napkin and a bag with your burger? Would you pay for a straw? Hotels could charge a fee for providing fresh towels daily, and a different charge for doing it every two days. Supermarkets could provide free parking, but reserve spaces near the entrance for shoppers willing to pay a small fee. Want someone to pack your shopping for you and take it to the car? That’ll cost. If not, the overall cost is cheaper.

The point is not to simply offer extras for a cost; it’s about stripping back a service to the bare bones, then offering consumers the choice of what, if anything, they add back in.

“Some businesses are going to have to embrace extra charges in order to survive,” says Cope. “Deliveries and courier services will be entering the mainstream more and more, beyond corporate business. For instance, a company like Blockbuster needs to look at a premium, pizza-style, home-delivery service. Look at [online shopping service] Ocado – consumers already pay someone extra to do the shopping for them.”

Murphy says Ryanair has become shorthand for a pricing concept “that was simply inevitable” He adds: “It’s a metaphor for a changing world. Many consumers don’t like the ‘take it or leave it’ approach to life. They want variety and to be able to pick what they want.”

In some business sectors, consumers have long been accustomed to incidentalist pricing. Anyone buying a new car knows that it’s going to cost them more than the advertised price if they want the MP3 player, leather seats and the fancy wheels. With insurance, the premium rises and falls according to the level of cover you want. Book a hotel and it’s one price for room only, another to include breakfast, and another for a view.

So why is now the right time for this concept of pricing to become more widespread? Because the recession is giving consumers a sense of satisfaction in being a savvy shopper. “People are taking pride in how little they spend, rather than how much,” says Paco Underhill, chief executive of Envirosell, a research and consulting firm that special-ises in consumer behaviour, and author of the book Why We Buy: The Science of Shopping. “Shopping at Lidl was unthinkable 10 years ago if you didn’t need to; now it’s just smart.”

Online research company Communispace has been looking at what the new ‘normal’ consumer might look like as they recover from the economic battering they’ve endured in the past year. Manila Austin, director of research at Communispace, says people are impressing their friends and neighbours not only with what they buy, but also what they don’t buy. Non-consumption is something to be admired, and getting a bargain has become something of a sport. “Playing the game is an end goal in itself,” says Austin. “It’s not just the deal you get; it’s the fact that you did a good job getting that deal. Maybe it’s always been there but it’s certainly more obvious.”

In the US, management firm Oliver Wyman surveyed 2,000 consumers and found strong willingness to pay $7–$9 (€4.50–€6) for a one-off, high-definition, video-on-demand viewing of a film on the day it is launched on DVD – significantly more than renting the disc in a store would cost on the same day, but without the need to leave the sofa.

Of course, there’s a point at which consumers will object to paying extra for something they believe should be part of the basic price. Ryanair caused media outrage last summer when it talked about charging passengers to use toilets on its planes. However, Cope doesn’t think paying for the toilet is that outrageous, adding: “The days of free public toilets in mainline stations are disappearing fast”. All Nippon Air encourages passengers to go before take-off to reduce weight.

Attempts to impose costs based on size and weight have not run smoothly. The Supreme Court of Canada has ruled that transport operators must provide two seats for the price of one if people can’t fit in a single seat, and Air France was sued by a passenger who felt humiliated at being forced to buy an extra seat to accommodate his girth.

What consumers really object to, though, is not extra charges but underhand charging tactics. Amazon faced a backlash when its differential pricing model was exposed. The company charged buyers different prices for the same item, based on what it calculated was their willingness to pay, which took into account the items they’d bought before, and at what price. In this case, consumers didn’t have a choice over whether to pay or not. Needless to say the system is no longer in use.

While consumers don’t like hidden charges that mean they cannot buy an advertised product at an advertised price, they do like the ability to not pay for things they don’t want. The difference is between squeezing more out of captive customers, and empowering them.

Murphy says there are two views, and successful use of incidentalist pricing depends on total openness with consumers. “You get miffed because you’re asked to pay for things you believe should be free. But, you’re pleased when can opt out of things you don’t want and select only what you do want,” he says. “This is where corporate responsibility as a concept is headed. Companies need to say, ‘These are our charges, there’s no small print’.”