The price of liberty
With travel and Covid in the blood, which one will win out, and at what cost? By Vijay Verghese
The late management guru Peter Drucker, who presciently advocated back-office outsourcing and corporate decentralisation at a time when such smart cost-saving techniques were anathema to do-it-all mega-corporations, had a few other tricks up his sleeve.
One of his key mantras — price-led costing — is often overlooked. Yet it is profoundly relevant to all businesses, especially those connected with travel, and well worth reexamining in a dysfunctional Covid world.
The central argument is simple. Most companies tend to create a product they feel the market wants and will outspend each other to produce it. The entire cost gets passed on to consumers with a further slab of profit to pay humungous chief executive salaries and bonuses on top of all this extravagance. This is cost-driven pricing and is typical of the sort of big-ego branding popular today.
Drucker’s answer to this was blindingly simple. Check the price your audience might be willing to pay for a product and then keep production costs and profit margins within this budget. This is price-led costing. It is as relevant for airline seats as for luxury hotels.
Of course price-led costing is entirely predicated on scarcity, which drives price. One of the problems monster brands such as Louis Vuitton faced in Asia was overexposure, which drives down perceived value, often with perverse results. At one point Hong Kong consumers shunned LV monogrammed travel bags due to their mass popularity with Macau casino bumpkins.
GOODBYE, SARDINE CAN
As airlines posit scenarios in a Covid-19 or post-virus world, they realise that passengers will need to be distanced and isolated somehow to allay fears of contagion. With previous models entirely based on the sardine can concept of packing in as many seats and bodies as possible, this is revolutionary.
Aircraft design will move towards more protected personal space with wraparound headrest partitions, novel seating configurations and, perhaps, access to cargo areas reconverted into gyms or wellness escapes.
Family cabins may arrive in economy, modelled after the innovative Qsuites on Qatar Airways that can turn into quads for foursomes.
Fewer seats will invariably mean higher ticket prices. Will passengers accept this additional burden? Or might they consider it a worthwhile investment in emotional security or a sought after “luxury” perk?
In other words, might travel once again become something expensive, rare and unattainable, a romantic treat as in the days of the magnificent Pan Am Clipper “flying boats”?
Travellers will increasingly see luxury hotels as safe havens with trustworthy protocols, unlike the unregulated bottomfeeder Airbnb offerings, now fraught with unknown dangers.
Huge, cookie-cutter, fairy lights hotels will not disappear as there is always space for mid-range products. But in a Covid world, there can be no scrimping on safety and this will push prices up as operators factor in guest spacing, staff training, enhanced hygiene, lavish wellness partnerships and thermal-scanning equipment.
But regardless of whether prices inch up or down, business models must be thoroughly reviewed and reset. Dropping oil prices (though this may be short term) and the Covid reality offer a huge opportunity for a travel rethink.
It is time to abandon the sloppy costled pricing that has dominated monster travel projects, based on the assumption of ever-increasing hordes of cash-rich Chinese consumers.
That is now a mirage as travel for the near term turns inward with a focus on domestic transactions and “safe corridors” (pairing cities or countries) whether in China, the US, India, Thailand or Indonesia.
Price-led costing will be the key, whether aiming for the luxury traveller or the less financially frivolous.
DEMANDING VALUE
Travellers willing to spend for a romantic break will make very careful choices and demand a lot more value. They will be in the driver’s seat now.
Travellers looking for value will be equally demanding. Gone are the days when a guesthouse could say, “You get what you pay for.”
Safety cuts both ways. Hotels and airlines will need protocols to ensure their clientele is potentially okay.
Travellers will examine holiday escapes in minute detail, perhaps preferring less trampled places like the Maldives where privacy is ensured and social contact minimised.
Business travellers cautiously venturing out may be the hardest hit as this is the segment where the travel sector will try and make up for the loss. It would do well to remember though that with work-from-home and video conferencing the rage, there is no inelastic demand anymore.
Too much of a fare hike will dull corporate enthusiasm. Travel is already a significant cost for companies and medical-travel-labour insurance premiums will soar in a Covid world.
For a start, travel will stay close to home (and close to medical fallbacks) and we will become like children learning to walk, picking up the courage to foray farther each day.
But like that infernal coronavirus, travel is in the blood. We’ll find out which wins out.
In the meantime, the travel industry can restore itself by stepping away from the mirage and incorporating sound pricing practices.
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It is time to abandon the sloppy cost-led pricing that has dominated monster travel projects, based on the assumption of ever-increasing hordes of cash-rich Chinese consumers.
Vijay Verghese is a Hong Kong-based journalist, columnist and the editor of SmartTravelAsia.com and AsianConversations.com