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Written by Jon Dean on Monday 10 June 2013

The hot topic in the office this week is customer experience – in this case relating to airline bookings. One of my colleagues found himself becoming increasingly frustrated by the online booking process for his flight to Dublin with Ryanair.

As anyone who has tried to book flights with the Irish carrier recently will attest, the process has become something of an arduous task designed to maximise up-sell opportunities, which could lead to some customers accidentally paying for add-ons they do not need. These include:

  • The anti-spam filter to check that the on-line visitor is a real person, usually an obfuscated image of text to re-type, now replaced in some cases by a “quiz” where the customer has to watch an advert and answer a question based on its content.
  • Travel insurance automatically included – the customer has to select “Travel without insurance” as their country of residence to remove this charge.
  • A seemingly endless list of chargeable extras such as a reserved seat, text confirmation of booking, airport parking, mobile talk plan, purchase of a compliant sized cabin bag, car hire and a £2 lottery ticket to win your flight cost back.
  • A separate browser window which opens up to offer you a hotel.

In one sense, you could argue that this is all great for consumer choice and pricing transparency. It’s driven by last year’s regulation from the OFT and the airline’s desire to top the cheap flights tables on aggregator sites. Indeed, there are some parallels here with the small print and disclosure requirements in financial services product sales. On the other hand, deselecting the unwanted extras approximately doubles the time a customer has to spend on booking flights. Small wonder that Ryanair came bottom of a customer survey of 16 short-haul airlines in December 2012 by Which?

There is a point for any customer at which they are not prepared to concede a further reduction in service in return for yet lower prices. Ryanair have gambled on not alienating customers who want “cheap” in an attempt to win more customers who want “really cheap”. So far it is working – market share in Europe rose 4 percent last year to 38 percent, with profits up 13% on last year. Time will tell if this is sustainable.

A similar drive for cost reduction and added-cost options is happening in financial services. Leading the race to the bottom are the general insurers. Variables and extras for a typical household policy now include interest on monthly direct debit, charges for paying by credit card, home emergency cover, legal expenses cover, and cycle cover. In addition, customers can vary their policy excesses to “self-insure” in order to reduce their premiums, and increasingly, flood cover and escape of water are subject to increased excesses. Once again the online aggregator sites are the prime culprits, pushing insurers to reduce headline prices without exposing themselves to excessive risk.

All this is well and good and keeps new customers happy, until it is time to make a claim. Having selected a policy based on price, they may suddenly realise they have inadequate cover at just the point where the family home is damaged or possibly uninhabitable – and find themselves many thousands of pounds out of pocket as a consequence.

In “The Discipline of Market Leaders”, Treacy and Wiersema talk about the tension between the best products (Product Leadership), the lowest costs (Operational Excellence) and the best customer experience (Customer Intimacy).

Any firm operating in a competitive environment must place itself towards one of these disciplines to differentiate itself from its rivals, and compromise somewhat on the other two. In effect it is too costly for any business to be the best in the market at all three things. For mass market products, the on-line aggregator is pushing providers down the operational excellence axis and away from customer intimacy and product leadership. Customer intimacy is increasingly the preserve of the wealth management adviser, whose customers are prepared to pay for advice and good service.

Ultimately, logical consumer behaviour at the microeconomic level is having the macro effect of reducing choice for the mass market. The Retail Distribution Review has laid bare the true costs of financial advice, resulting in many average consumers being discouraged from seeking it. As advisers move up the value chain, providers for the mass market have an opportunity to capture some of the customers they are leaving un-served, and are doing so in three main ways:

  • Reducing operational (back office) costs, for example by outsourcing, to make product offerings affordable
  • Enriching their direct to consumer offer, to enable more self-service
  • Demonstrating real added value using unbundled charges, so that customers can truly understand what they are paying for and are better able to decide if the service is worth the price

One could argue that Ryanair have done all three. We may all complain about the online experience, the expense of extras we used to take for granted and the less than generous baggage allowance, but ultimately we get what we want – cheap flights. In my work on change programmes in financial services businesses I frequently hear that a key design principle is to cut costs but not reduce customer service. Can this be done, and should we even try? I wonder whether for the majority of customers, a little inconvenience is a small price to pay, assuming of course that the product actually delivers the promised outcome.

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