WOW! effectArticle

Looking from another point of view, once you had bought a Ryanair or EasyJet ticket, who of us relied on God’s benevolence, praying that everything would go well? And I’m not talking in the sense of “fear of flying”, but worried that something might go wrong ruining the whole experience. Pushing us so far to initiate some voodoo rituals to avoid to get in touch with unresponsive customer services.

What’s an airline ticket? Is it just an agreement to carry you from point A to point B? Or is there more to it? What do you honestly think a ticket is? It is a seat on a plane, and that’s all, or it includes services that traditionally came with a seat, such as baggage checking, seat reservations, and even the ability to pay by credit card?

Confronted by long-term industry financial losses, and struggling to re-establish profitability, numerous airlines in the United States and elsewhere have introduced a business model to separate the ancillary services (and fees connected). Welcome to the unbundled skies. Unbundling is the practice of separating as many cost components as possible — in the case of air travel, baggage, boarding, meals, miles, wi-fi — and selling them apart from the basic fare.

Champions in that kind of business remodelling are airlines such as Ryanair, EasyJet, AirAsia, SouthWest and many others. One, in particular, has caught my attention: Spirit.

Spirit is an extreme example of the “unbundling effect”: while airlines separate services and charge ancillary fees, consumer frustration has grown exponentially. To joke about Spirit’s Customer Experience is easy as hitting an easy target. Have a look at the following tweet, for instance:

Replies to that tweet:

• “Imagine a greyhound bus in 1999. Now imagine it is in the air.”
• “They call it Spirit because you pay the difference with your soul.”
• “Don’t do this to yourself.”
• “Imma pray for you.”

In Reddit I found interesting comments about Spirit. The tone doesn’t differ a lot from the above tweets:

I can see the disgusted faces of my CXPA friends with expressions ranging from anger to shame. I also see the light in the eyes of the Net promoter Score Talibans: the flames of hell appear soft lights of a wellness center in comparison. What about Customer Experience? What about creating the “wow’ effect” winning the loyalty of our customers? What about the strong relationship between willingness to recommend and long term revenues?

Let’s have a look at Spirit from a different angle. Let’s crunch the financial and operational figures. Spirit is profitable. Since 2009, its operating margin has consistently been well above the industry average, peaking at an astonishing 24% in 2015 (compared with an industry average of 15%). Revenue has climbed from about $700 million in 2009 to $3.7 billion in 2019. It’s still growing — the carrier just completed an order for 100 new Airbus and invested in a USD 250 million campus headquarters near Fort Lauderdale (Florida).

The Spirit stock shows as well an interesting performance with a strong Consensus EPS met or beaten in the last 4 quarters and an analyst price target at USD 50.60 vs the current price at USD 42.80.

Analysts’ recommendations are also very positive with a clear BUY or STRONG BUY trend.

A serious financial analysis should consider the performance of Spirit comparing the industry. Analysing Spirit vs industry and competitors gives us a picture of a strong and successful Company.

On the other side, a recent study on airline Tweeter mentions found that 69% of Spirit related tweets are negative. the worst of any carrier considered in that study. The Net Promoter Score observed by customer.guru shows a -4, slightly below the industry average. It raises my provocative question: Customer Experience and Net Promoter experts are forever telling us that this scenario is simply impossible; eventually a negative popular image will crush your business in the longterm. There are also several academic papers investigating the effects of “unbundling” fees in the airline industry and their consequences on customer behaviour. In all these papers conclusions bring to the point ancillary fees are perceived negatively by customers leading them to “non-loyal” behaviour. If that’s the case, how do we explain Spirit financial success year after year?

To find a possible answer to this question, I looked in two specific directions to better understand customer behaviours:

• the effects of unbundling on customer behaviour
• the effect of marketing promise on the customer experience expectations

The first direction is clearly more related to the airline industry, while the second has a more general aspect valid in all industries. On the other hand, the effect of unbundling can be found in other industries as well, e.g. telecommunications.

The effects of unbundling on customer behaviour: Unbundling in the airline industry: An empirical study of airline fees and their consequences on customer behaviour (June 2011)

The research adopts an interesting perspective that suggests much stronger negative effects other than a variance in perceived fee benefits. The study incorporates perceived betrayal as a means to understand customers’ anger with airline fees as well as retaliatory customer behaviour. The conceptual framework is summarised in the following chart:

The important node of this framework is the “FEE-RELATED ANGER” which creates two specific outcomes: RETALIATORY BEHAVIOUR and AVOIDANCE OF FEES. In our specific case we are more interested in RETALIATORY BEHAVIOUR because the practical outcomes are relevant to the Spirit Airline case. Retaliatory behaviour is defined as “efforts made by the customer to punish and cause inconveniences to a firm for the damages it caused them” (Grégoire and Fisher, 2008). Customer retaliation can include three forms: vindictive complaining, negative word-of-mouth (WOM) and third-party complaining.

Without going to deep in the study, we can say that if customer doesn’t perceive benefits, or it is not able to rationalise the price structure of the airline fees, he will then perceive a FEE-RELATED ANGER leading him to a RETALIATORY BEHAVIOUR. This explains a lot of the retaliatory behaviours of Spirit customers.

This study surveyed 464 customers of a large travel agency to investigate consumer perceptions of ancillary airline fees and the relationship on negative emotions such as anger and behavioural outcomes. The results show that airline fees lead to customer anger and, subsequently, to various forms of retaliatory behaviour. I personally think one important conclusion of that paper is “It can equally be said that the airlines have not recognised the public relations consequences of such a drastic pricing strategy change, failing to educate consumers to the realities of airline travel and to the value being created by branded travel products and unbundled pricing, by which a passenger chooses and pays for desired amenities rather than some being subsidised by others for their use.” This is an extremely important conclusion when we will link it to customer experience. Let’s now link that cause-effect to the perceived Customer Experience.

The effect of marketing promise on the customer experience expectations – A framework for managing customer expectations (J. SHETEH, B. MITTAL, Journal of Market Focused Management, 1, 137-158, 1996)

Customer Experience Management is not a “new topic”. Pine and Gilmore (1998 and 1999) were some of the first writers to address the notion of the customer experience (see also Lou Carbone and Haeckel 1994 and Johnston 1999). In their paper in 1998; “Welcome to the Experience Economy” and their book the following year; The experience economy – Work is a theatre and every business a stage, Pine and Gilmore observed that as services are becoming more commoditised leading-edge companies are competing on experiences.

What becomes extremely important in this context is to understand how marketing generates expectations vs the delivered experience. In our particular case, how airlines manage customer expectations and, how they educate consumers to the realities of airline travel in an unbundled pricing model.

Marketing scholars have argued that firms should meet or exceed customer expectations in order to achieve customer satisfaction. Often, however, customer expectations may be unjustified, infeasible, or unproductive to meet. Customer expectations can be accommodated or shaped. Given the high costs of expectation failure (Nyquist, Bitner, and Booms, 1985) it is important for a firm to ensure that its customers hold realistic expectations about its products and services. Thus, the process to shape them (shaping) become vital to be successful (win-win outcome).

Shaping is the marketer’s use of communication and other cues intended to alter customer expectations. The authors of the paper propose three paradigms for shaping expectations: the human resource management paradigm, the framing paradigm, and the compliance paradigm.

1. The human resource management paradigm where marketing managers must manage customer expectations just as they manage employee expectations – by shaping them. Where properly segmenting the customers and shaping the right message to the segment is the key success factor. Correct segmentation and targeting allow not only more-well fitting product or service offering, but they also permit more realistic promises to lure customers.
2. The framing paradigm where framing is the perspective people employ to view a scene and perspectives are known to change the view. For instance, a shopper who accidentally wanders into a store might be delighted to find a 20% price markdown; but a shopper lured by a hyping a “tremendous” sale might be disappointed with the same 20% markdown. Since expectations are reference points (perspectives) the theory of framing can be utilised for shaping some customer expectations.
3. The compliance paradigm. The third paradigm for expectation shaping is mandated compliance. Compliance has been defined as “behaviour by subjects or actors that conforms to the requirements of behavioural prescriptions” (Young 1979). Three ‘sources’ of prescriptions are utilised: prescriptions by government regulation (e.g. mandatory infant seat for car passengers less than 12 years old), by a group and social norms (similar to the government but promoted by lobbying entities), and by business procedures. Example of business procedures is minimum purchase requirements, merchandise return policy, airplane seat policy, free cabin baggage allowance.

Connect the dots

Airlines must manage fee-related anger and educate customers in order to set correctly the expectations of their customers. The airlines can set expectations working with the 3 paradigms I introduced in the previous paragraph. I did a quick mystery shopping exercise with Spirit to check how they shape my expectations while I’m booking a ticket.