The Lesson in American Airlines’ Smart Pricing Plan for its Exclusive Club
(This post originally appeared on Entrepreneur)
After months of agonizing, I decided to join the American Airlines Admirals Club. It cost 400 bucks.
You see these clubs at the airport, and I’m sure, if you’re like me, you probably wonder what goes on behind those double closed doors. Topless dancers? Bubbling champagne? Celebrities and VIPs discussing billion-dollar deals over cocktails? Not quite.
Most of these clubs are just glorified offices, with higher speed Internet, cubicles, comfortable chairs, wide-screen TVs and free coffee. The Admirals Club (recently re-branded as part of the merger between American Airlines and US Airways) also offers free cocktails. Some even have their own, in-house restaurants with à la carte pricing.
But is it worth the $400 (or more depending on your status with the airline) annual membership fee? Since joining I can confirm that the club is great and I’m enjoying it. But that’s not the point. The point is what happens after you pay the fee. And the lesson is a great one for anyone running a small business, like me.
Pricing is psychological. There are two types of customers in this world, or at least in my world: the ones who can’t commit (pay as they go) and the ones who can commit (subscribers). Businesses hate the pay-as-you-go types and love the subscribers. Just look at the numbers.
I’ll probably visit the Admirals Club about 20 times this year because I travel about one to two times a month. So at the $400 membership fee I paid, that works out to $20 per visit. If I visit 30 times this year that’s $13.33 per visit. Even if the club offered me the ability to just pay $20 or $13.33 each time, do you think I’d visit as much? No way.
Psychologically, if I had to fork over that amount each time, I’d be forced to consider whether it’s worth it to spend the money or to just suffer with the peasants in the waiting area with slow Internet and coffee in plastic cups instead of porcelain mugs. I’d rationalize that it’s still cheaper to get a $6 beer in the bar. I wouldn’t do it nearly as much.
That’s the brilliance of American’s pricing model for its Admirals Club. OK, not that brilliant. But smart. Smart enough to realize that the subscription model always makes more sense than a pay-as-you-go model. Sure, there’s probably the odd customer that consumes $50 of alcohol, coffee and the complimentary fruit left out each time he visits, but those guys are few and far between. The typical traveler, like me, costs very little to service. So once the club’s overhead is paid each new incremental subscription is pure profit.
This is why you and I are constantly asked to “sign up” for services that happily renew our subscriptions automatically with just a simple checkbox ticked off. This is why we have “minimum service fees,” “monthly premiums” and “annual subscriptions” for our TV, Internet, phone, insurance, music, movies, credit card, data backup, legal and accounting engagements.
Subscription services are the way to go. Smart companies know this. They’re not only benefiting from a recurring cash flow but they’re building a significant value in their companies — one that can be sold someday to a buyer who will pay a premium or a multiple for that ongoing revenue.
In these days of annual agreements and ongoing services, shouldn’t we all revisit our revenue streams? What, if anything our businesses do, can be turned into an annual fee? A maintenance plan? A premium support agreement? A warranty or other service commitment that our customers will find of value?
If you’re a roofer, how about a service plan for your guys to visit your customers once a year to inspect the roof and clean out the gutters? If you’re an auto mechanic how about a service plan that covers basic oil changes and delivery of a customer’s car to and from their home? If your company sells technology, like mine, is there not room for an ongoing service to update, fix and train for a flat annual fee?
Every business provides services and everyone is looking for more convenience in their lives. Not everyone will pay, of course. But some will. I did for my Admirals Club membership, which means I’m locked into spending more money with American than I would probably do otherwise.
OK, maybe it’s not completely genius. But it’s smart.