The theory of bounded rationality is about economic decision-making where, rather than seeking the perfect choice, the human brain instead seeks an option that feels efficient and satisfactory. This can be applied to the way airline customers decide whether an offer is worth the price.
When consumers make a purchasing decision, they face three kinds of limitations: time, information, and their own knowledge or understanding. As a way of coping with information overload, the human brain has evolved to make expedient choices. Rather than wasting time and effort pursuing and analyzing every option available to us, it is more valuable instead to make a decision that seems rational enough. It may not be the best possible decision, but humans will choose something that feels satisfactory.
Iain Griffin, Chief Executive of Seatfrog, gave us some insights on this: “Our behavioral research with passengers has shown that most people don’t know what a business-class seat is worth. But it’s not as simple as just showing them an image of what the seat looks like. A key strategy is to give passengers an anchor value, which gives them the confidence to make an informed decision, in turn maximizing price and increasing conversion. One way we do this is by using a ‘buy it now’ function to establish value in advance of their flight, making them think ‘this seat’s worth $2,500 if I upgrade now’. Then on the day of flying, when their willingness to pay is at its peak, they’re pulled into a live auction on their mobile, with that value clear in their mind.”
Founder and CEO of Plusgrade, an airline revenue upgrade platform, Ken Harris, also elaborated on how customers decide if a price is right, “We have a dozen passenger touchpoints from booking to departure, where the passenger might receive emails, text messages or app notifications. At all of these touchpoints, we have engines evaluating passenger profiles and itineraries in real‑time to decide whether we should invite them to bid for an upgrade. Once they submit their bid, some of our airline partners have other feedback loops where, prior to departure, they can let passengers know what the likelihood of their success is at that point. It’s about continuing the conversation so there’s an automatic loop between airline and customer throughout the journey – so you’re helping to guide them to a fare that they want to pay.”
What does this mean for airline travel?
Airlines cannot control a traveler’s time or their ability to understand information. They can, however, supply the right information to that traveler to effectively convey the value of purchasing an extra component. This means the airline exerts more influence on the information behind that customer’s decision, while also enabling the customer to feel satisfied with the price on offer.
For more insights, download a copy of Embracing airline digital transformation: a spotlight on what travelers value.
Originally published on the Amadeus Corporate blog.