A lesson in business from an airline

How Icelandair maximizes their profit, upsell services to people who originally weren’t willing to pay for them, and make their customers happy at the same time.

Being an international student, I fly relatively often across the Atlantic. Naturally I’ve found a few airlines I like and regularly travel with. Those are Icelandair and Norwegian, and occasionally SAS.
Norwegian is a low-fare airline who don’t offer a business class. They have economy comfort, but I don’t believe it’s worth the 300% price jump as economy is really good (best in the business), and there aren’t many differences to comfort.
Icelandair offers both economy comfort and business class, but their business class reminds me more of economy comfort on other airlines. I haven’t tried their economy comfort, but from the looks of it there aren’t many differences from regular economy.
SAS provides both great economy comfort and business classes, but I rarely fly with them due to the price and inconvenience.

Where am I going with this you may ask? Well, because of the reasons mentioned above I booked a regular economy ticket when traveling with Icelandair back to the U.S. soon. I recently received an email from them encouraging me to make a bid to be upgraded to business class. Naturally I placed a bid at what I thought their business class was worth, about 50% on top of the original economy ticket price.

I started wondering why they would do this? Why offer people who obviously weren’t willing to pay the premium for business class an upgrade? That’s when I reached the following conclusion, which is quite the clever business strategy if it’s correct.

The lesson

Imagine a fully booked Icelandair flight, with the exception of a few seats in business class. What happens when a group of, say, 4 people try to book tickets? They can’t, simple as that. Most (over 95%) customers aren’t willing or have the ability to pay for business class. As a result, they end up taking their money to another airline.

In that case, Icelandair loses both money and customers to a competitor, and that’s not sustainable in the long run. A solution to that problem would be to free up space on economy class for other customers. How do you do that? It’s simple, you move people from economy to business. Doing so has two advantages: fills up the plane to maximize your earning potential, and make a few customers very happy and likely to fly again/ tell about you to their friends.

But what if I told you there’s a way to make some money from the people you upgrade? It’s better they pay something (even just $50) than nothing. How do you choose who to upgrade and how much to charge them? Since none of them were willing to pay for business originally, that’s a hard one. A A solution is to simply ask people: “how much would you pay?”, and pick the highest bidder.

There are a number of other advantages to the bidding. It feels less random and more like a game, which people take as a reason to fly with Icelandair again instead of trying a different airline.

At this point you’ve filled up your plane, maximized what you could earn on it, and made a bunch of customers very happy while doing so. But what if a group of people willing to pay full price for business suddenly shows up when you’ve just upgraded economy passengers for $100 per person?

Icelandair reserves the right to not accept any bids, and they don’t announce the winner until 24 hours before the travel date. That way, if someone does show up willing to pay for business, they just tell all the bidders “sorry your bid didn’t cut it, better luck next time”.

Similarily they take your credit card information and make you accept a set of terms, which states that if your bid is accepted you have to pay. That way they can also open up the equivalent number of economy class seats, and upgrade existing ticket holds if someone wants to buy theirs.

I was very fascinated by this strategy, as it’s a perfect example on how to maximize your profits, upsell services to people who didn’t want to pay for them, and make the customers very happy at the same time. I haven’t had time to think through how this strategy is applicable to for example the App Industry, but I’m sure it’s a valuable lesson.

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