The greatest pricing hack of all time

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….

Ryan Air CEO

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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The ultimate innovators – kids

I’m starting to believe that the ultimate requirement for innovation is ignoring barriers. Not inventing rules that are not there. The second part of this thought is that we are trained over time to ‘assume the rule’ – when in actuality there is no rule.

I’ve been watching my daughter recently do little the things that I’m sure all kids do.

I play a game with my daughter where I show her how to stand on one leg. I don’t tell her what to do, I just stand on one leg…. and of course she wants to do it too because it looks like fun. And she copies me immediately. But because she has only recently learned to walk, she can’t quite manage it the way I do. So she without hesitation runs to the nearest wall, puts one hand against it to gain balance, and successfully stands on one leg. At this point she is very pleased with herself that she has managed to do it. Big smile ensues as she looks to me for approval…

And here’s the kicker… I am pleased with her too. But not in a kid like condescending way. I am seriously happy with her approach. And here’s why:

At no point was any rule given that you can’t lean against the wall. She hacked the system and got it done. I clap her and encourage her. In this instance it’s all about the objective, not the method. And the one thing I will never do is start to reduce her mind with rules that just aren’t there.

What we should do with our startup is innovate like kids do. Ignore how the bigger, more resource laden and older incumbents do things, and just hack for a result.