Before I tell you this story, you need to understand a couple surprising facts about airlines.
Fact 1: The airline industry is a ‘net loss’ industry. If you add up all the profits and all the losses of airlines since commercial aviation began it’s around $60 billion in the red.
Fact 2: The profit margin on a 1 hour flight is around $2 per passenger. (around 1 GBP)
Now for the greatest pricing hack of all time.
When a low cost carrier like Ryan Air sells 10 pound fares, or 1 pound fares for that matter – they make more money then we’d imagine. The reason is simple: around half of the travellers who bought these ultra cheap tickets don’t turn up.
They buy the tickets as a kind of ‘future travel insurance’ – a ticket in case they want to go to Prague… I mean they intend on going, but the tickets are often bought very long in advance, and so cheap, life gets in the way and they decide to not go. It’s only a small amount of money, the cost of a coffee….
Crazy Michael (The Ryan Air CEO) keeps the money. The ‘no show’ money is 100% pure profit, and often more than what they’d make with an actual passenger. But here’s the kicker, there is no refund or changing of dates, so he gets to sell those ‘no show’ tickets again. After a period of time Ryan Air have worked out an algorithm of how many forgo their cheap tickets. They then over sell the flights by that amount of passengers. They know the percentages, and they’re nailing it.
This hack will keep on working, so long as they don’t get greedy. If the special is on too often, it will reframe price expectations, and change the ‘no show’ ratios. If they can resist temptation, they have a winning formula.
It’s another great example as to why price should never be an afterthought. The price is something every startup should be hacking daily.
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