The Elasticity of Service: a hidden tipping point in Know your Product
I recently complained, failed to get anywhere and left my favourite airline (not BA) over two routine issues.
- They ‘knowingly’ booking me through their hub when they knew I couldn’t make their own 2nd leg, waited 7 hours and then missed a further connection later…
- A silly tier mileage thing, trivial but it meant I couldn’t get to the top tier level despite them planning it for me.
Thankfully these are not the subject of this post because they are well-trodden and frankly boring to anyone but the emotional ‘being’ experiencing those special peaks of hate reserved for the airlines whose services fail and then blame the process/system.
This post is about a hidden tipping point in service demand and the risk of losing not just many high paying, but every good and previously loyal customer.
A bit of technical (but not too much)
Elasticity was taught to us in those dark economics 101 classes as the degree to which product demand and supply curves react to changes in price. Broadly, products deemed essential are bought constantly despite price changes (inelastic) because the value/need of the product exceeds the reaction to a price rise. On the other hand, nonessential, readily available products that are subject to price rises, may experience a drop in demand (elastic) and switching.
Libby Rittenberg and Timothy Tregarthen write in their book Principles of Microeconomics, v. 1.0: “The price elasticity of demand for a good or service, e, is the % change in quantity demanded of a particular good or service divided by the % change in the price of that good or service, all other things unchanged.”
e, = % change in quantity demanded / % change in price
If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic.
Back to Airlines…
Now Business and First Class travellers, mostly, don’t pay for their own tickets and those who do (me included,) are relatively inelastic to changes in price but we are (as I discovered) incredibly elastic to changes in service. There are various large and powerful ‘communities of business/first travellers’ who are adamant that ‘x’ airline shouldn’t get away with their appalling service. While I ‘sticking pins’ in airline models (metaphorically) and enjoying the banter between fellow sufferers, I pondered the elasticity/inelasticity of demand versus fluctuations in service, not prices.
What if (for example) we transposed the term ‘price’ with the ‘service’, and then ask:
“What would be the % change in quantity demanded of airline flights divided by the % change in the service provided for that airline flight, all other things unchanged?
e, = % change in quantity demanded / % change in service
[Note: we are just undertaking some quantitative and qualitative research and will publish it later this year]
In the meantime, our subjective data indicates a dramatic effect, amongst Business and First Class travellers. The impact of which is substantial.
The hidden tipping point in airline service for this customer group is between on-ground and in-air. Let me expand:
The aircrew has an advantage. It is a tight team in a small controlled space handling a few customers who have more frequent, broader categories yet lower volumes of service demand. Customers, once settles in the ‘territory of their seat’ are quite predictable. Well led, it the team discharge all customer service needs because everything ‘expected’ by the customer is on-board and the team is trained to discharge all service needs in a confined area. They are the guardians and ambassadors of the service brand and reputation.
Ed Mady, GM Beverly Hills Hotel captures this in a simple statement of service from customers:
“Remember me, recognise me, anticipate my needs, give what I want on time” and “The Experience minus your Expectation = Value.
On the ground – land-side and air-side
They have a huge space to manage; large numbers of staff; more dispersed leadership; a huge mix of services and skills. The simple journey through check-in, getting to the Business and First Class lounge, out of the lounge and into the plane has multiple touch-points.
Within the Business and First lounges they can control this territory. The ‘serving’ staff are generally great guardians and ambassadors of service brand and reputation.
But here is the kicker…
On the floor, management is universally conspicuous by its absence, almost invisible. In fact I cannot recall ever being greeted ‘on the floor’ by a manager in either lounge. In the ‘air’ it happens beautifully….. why?
What is our Product and what isn’t it?
Ed Mady made his reputation by institutionalising this:
“Our product is contact’ – not the meal, the venue, the bedroom or anything else but how we make ‘contact’ with our customer. That first and last impression is entrusted into the hands of every employee, they are the guardians and ambassadors of our brand and reputation.”
I’ll always remember taking a study group to the Ritz Carlton, San Francisco when Ed was the GM there (prior to the Beverly Hills Hotel).
One lesson never left me »» Ed didn’t have an office.
He started every morning at the front door at 6.30am with the bell hops and spent every single day walking the floors and departments, making ‘contact’ with his people and customers and treating them all in exactly the same way – he coined the phrase
“We are ladies and gentlemen serving ladies and gentlemen.”
His managers followed suit and lived ‘on the floor’ where the service is, occasionally attending planning meetings but occasionally. They obsessed on Ed’s maxims:
- “Our product is contact”
- “Remember me, recognise me, anticipate my needs, give what I want on time” [followed later]
- “The Experience minus your Expectation = Value.”
- “We are ladies and gentlemen serving ladies and gentlemen.”
Behind all of this sites brilliant systems thinking, encompassed in Ritz Carlton ‘Blue Book’ – the bible of hundreds of brilliant customer service processes – all tested, all working as a system and all built and improved around the maxims above. Ed led the Ritz Carlton, to win the Malcolm Baldrige National Quality Award twice, in 1992 and 1999. So he and they know what they are doing.
Back at the airport…
On-ground airport lounges are no bigger or more complex than a Ritz Carlton Hotel and they need leaders walking the floors leading the product, which should be ‘contact’. They should lead by example and make themselves known and available as the guardians and ambassadors of the service brand and reputation.
What next for airlines?
The % change in quantity demanded of airline flights divided by the % change in the service provided for that airline flight, may get airlines to look at the whole system their customers experience, not just business and first customers.
If you could make price inelastic by doing what Ed Mady does, goodness knows what may happen to your airline business?
This is also what SouthWest Airlines do, but that is for another paper…
Thank you for sparing the time to read this….
To read more on:
Ritz Carlton, the Malcolm Baldrige National Quality Award and demand elasticity/inelasticity:
- Principles of Microeconomics, v. 1.0, Libby Rittenberg and Timothy Tregarthen