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Pricing ancillary goods and services

March 02, 2013

United airlines, like some of its peers, appears to be continually on the lookout for new ways to get its customers to open their wallet. America's second largest airline announced that it will be selling early boarding access to passengers lower down the frequent flyer totem pole for $9 on a "limited basis"; the latter is to ensure that flyers with status aren't ticked off by a flood of parvenus at the gate. 

Figures put out recently by the US Department of Transportation showed the largest US carrier,  Delta Air Lines, had more than $233m in baggage fees alone for the third quarter of 2012, with United Airlines at $187m. Carriers in other parts of the world have successfully tapped on to the new revenue stream as the Wall Street Journal reported that Asian low-cost carriers already earn as much as 20% of their total revenues from ancillary income. The practice now extends to full service airlines like British Airways as well with the UK carrier charging higher fares for customers with checked-in bags.

Hotels have been less successful in augmenting their primary revenue stream with extras and when levied as WiFi/internet, "resort" or car parking fees it never fails to evoke customers' ire. One reason is that the disaggregated pricing model is never as transparent as it is for most airlines that practise it. (many travel managers have wised-up to the additional slabs and put out guidelines that tease out the details.) 

The foregoing speaks to a missed opportunity as hotels could do more by "upselling" during the booking process as the airlines now do. Some high-end hotels and resorts already do so with ancillary sales that include spa kits and amenities to entire bathroom accessories. 

However, there is probably a far wider stream of revenue if hotels (and airlines) got more creative by taking a leaf out of the innovative on-board sales pitch put out by Perurail on the train service from Cusco to Machupicchu. The staff doubles (triples is more apt) as dining staff, cultural ambassadors and fashion models! In the last avatar they don "exclusive" Alpaca (a Peruvian version of a Llama) wool attire that retails at hundreds of dollars to a captive audience. The company (partly owned by Orient-Express) does not break out the numbers but with an average of 4 trains per day selling roughly $2,000 per trip the company likely takes in somewhere around $3m a year.  Perhaps "ancillary" revenue can before long become the tail that wags the dog.

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