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Post Summary
Chris Anderson, author of The Long Tail, surmises that ‘free’ services will be a driver for business in the years to come. This post considers ways in which this could apply to the travel and hospitality market.
Chris Anderson, the man responsible for the idea of the Long Tail, has been at it again.
This month’s edition of Wired features an article called Free! Why $0.00 is the Future of Business which is about how items and services for which we are traditionally charged become free while as the potential to make money lies in ancillary services.
So, for example, you make your money not on the cost of a printer but instead the lifetime value of ink supplies. Or a newspaper becomes free on the internet as the increased audience enables it to earn enough from the increased advertising opportunities to cover the loss of income from people paying for a paper copy of the paper.
I have some issues with the articles conclusions but it is an interesting concept and one that is already being used within the travel and tourism industry.
Two examples:
1) Ryanair makes its money through food, drink, premium reservations - not just through seat sales. Michael O’Leary is on record as wanting to offer seats for free -and you just know he’s not doing this out of charity but because he knows there’s a workable business plan behind it.
2) Free Wifi Access in Hotels - it helps to differentiate one hotel from another but, presumably, could also be used to encourage cross subsidization of the service in other areas. For example, making WiFi access free could encourage guests to stay in their rooms and order more from the on-site catering.
Free Hotels?
When you come to think of it, there is little difference between a hotel room and a seat on a plane. Both are perishable commodities - once the fight takes off or the night is passed, there is no getting that unsold stock back. So, could we see the introduction at some point of the free hotel room?
Actually, I don’t see why not but I think it would need significant economies of scale to work - or a degree of monopoly provision to help things along. What I mean by ‘monopoly provision’ is this: if you are flying, you have little choice but to purchase water (for example) from the cabin crew if you have not planned ahead. You can’t pop out mid flight to get a cheaper bottle of water from the nearest newsagent or drugstore.
In other words, if there isn’t too much choice (as opposed to no choice) around, then there is a greater chance that you will be able to make money on incidentals. All airlines also have the appearance of a temporary monopoly for the duration of its flights in the form of a captive audience on the flights which means that they can sell advertising in the form of inflight magazines.
There’s no such thing as a free room.
So my thoughts are that this model might work in other areas of the tourism industry - but the trick is to identify those areas where choice is more restricted. Off the top of my head, I would suggest some remote rural locations might work under this model - there have been times when I have probably spent more on catering than accommodation in B and Bs in the North of Scotland because there simply isn’t any other alternatives.
Using my example, however, does raise the obvious question: “If I can charge £25 per person per night lodging and they spend £30 per person per night on meals, why should I make the room free and cut my income by £25 per night?” Well, the answer to that I guess is good old ‘price elasticity of demand’ - if the offer attracts enough new guests then it pays for the £25 per night loss.
Competing on Price and Quality?
So, in conclusion, I have reservations about this but I think that some brave tourism provider could well try this and if their business model is right then they will succeed. I have always been taught that to fight on price alone is a mug’s game unless you have deep pockets - however if you are able to fight on price and quality (in the form of meals, for example, that people will pay more for) then you perhaps have the makings of a winning combination.
Any thoughts?
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11th March, 2008 at 12:41 pm
Not sure I buy the B&B working. As you say, it would need to be remote enough to make its anciliary services desirable - but if it’s that remote it is probably getting guests on location rather than price anyway. It also wouldn’t have the marketing budget to get the word out, and it’s only going to be running three or four rooms. You need to be a volume business to benefit from Anderson’s ideas.
I can see its potential for the big budget hotel chains - especially at motorway sites where that remoteness factor comes into play again.
Anderson’s theories tend to be interesting ideas stretched to breaking point… kudos for taking this one on 
11th March, 2008 at 12:55 pm
“So my thoughts are that this model might work in other areas of the tourism industry”
eBay and Cultuzz sales rooms with start prices at 1 euros. But in the end of the process it will be 50 % to 80 % average rate room.
Can work for big hotel with lot of rooms and for special season.
Can’t work for small hotel. No business model for small hotel and for eBay or Cultuzz
I don’t think small operators want this business model
11th March, 2008 at 1:38 pm
Thanks Nathan and Claude - both good points.
I remain skeptical about the concept to some degree - and for the reasons you both allude to and I think that the B&B example I used is stretching it a little far!
As you both suggest, I suspect that you would need deep pockets in order to make this work and a less seasonal profile that perhaps my example would have.
I think one of the other problems for a smaller operator with emulating a ‘Ryanair’ model would be that you don’t have the some of the income streams that they have available - for example, income from advertising in the equivalent of the ‘in flight’ magazine wouldn’t work on account of a) to few eyeballs and b) the notion among smaller operators that ‘they’re all in it together’ - for one to start charging the others for space in the info packs typically left in guest rooms would be a cultural step too far.
having said all that though, I sense that you both might think it might work further up the scale…interesting to see if anyone does take it on!
“Anderson’s theories tend to be interesting ideas stretched to breaking point” - I agree and I think they tend to make better articles than books!
11th March, 2008 at 2:45 pm
Free rooms might be possible if there is a kind of vertical integration. A theoretical n example could be a special “Learn to ski Program for single´s with kids”
You employ a ski instructor for a month and sell an activity package where you charge for ski lessons, party & entertainment program and F&B but not for the rooms. This might extend a hotels season or support off season periods.
11th March, 2008 at 3:00 pm
That’s an interesting example Reinhard, because presumably there is exactly that element of captive market in your scenario.
I assume it is the case that once people are in residence at a ski resport, they don’t tend to wander off that much? And presumably the ski lessons etc are of higher value than off season accommodation?
I’m not sure if it the direct opposite or exactly the same principle as the all inclusive resorts, where food & drink is free and presumably revenue is on the accommodation and extras like sports and trips.
Stephen - your post has made my head spin!
11th March, 2008 at 5:12 pm
Reinhard/Vicky - again both good points.
I think the thing that’s coming through again is that this would be tough for a small independent operator to do - they tend not to have directly employed instructors/guides etc and so it needs that ability to offer a more diverse portfolio of services (beyond lodging) or sheer volume to achieve it.
I’m not sure about resorts although I always assumed that, beyond the different costs of living in various counties, that some all-inclusive resorts ‘loss led’ on lodging and made the money on incidentals. Can anyone confirm this?
11th March, 2008 at 5:20 pm
Now it strikes me, without going into too much scrutiny of Anderson’s early synopsis, that perhaps this doesn’t quite fit the Long Tail?
Well, it certainly throws up some questions with regards to Long Tail of Travel and “Free”.
Could niche operators, for example, with little or slim volumes being able to offset by going free?
Hummmm.
11th March, 2008 at 5:35 pm
Kevin, I think the key is to have range of services within the offering that enables the right degree of cross subsidy to occur. I’m not sure that a niche accommodation provider could do this but I can imagine that a niche tour provider might - assuming that their package involved rooms, meals, guides etc.
Actually, that’s made me think that the another example of the ‘three way’ model might be in the arrangements similar to those found in coach tours where the coach drops 30 willing spenders at a ‘honeypot’ and the driver and guide get their backhander from the honeypot for delivering them.
11th March, 2008 at 8:27 pm
If the companies don´t earn any money, there will not be a future for the company, “Free!” might be a a marketing slogan but not much more. An example which we sold successfully in our destination about 15 years ago, was a mountainbike-bike product called “Get your mountainbike an a free holiday on top”. We (a touriste office) got a price reduction from the KTM Bicycles Manufacture and instead of selling the bikes cheaper, the customers got free holiday vouchers. The benefit: Clients pay the same price as in any bike-shop but buying with us they got a free holiday between 3 to 7 days (depending on the hotel category) At that time we called it co-operation, today we call it crossmarketing or: “0.00 is the Future of Business????”
11th March, 2008 at 10:57 pm
[...] I came across an article called Free Entrance, Free Coffee, Free WiFi…Free Rooms, which was posted on the Tracking Tourism Blog. Steven, the author, picked up on Chris [...]
12th March, 2008 at 10:36 am
Dan G.
I stayed in an etap in Munich which was perfectly functional but not necessarily “pleasant” at 50 euros a night (about 30 pounds). Accor could, I reckon, offset a bit more of the price with a big advert on the wall. The room wasn’t exactly luxurious anyway so an advert would hardly offend. According to Andersonomics the lower price would drive demand, eyeballs and therefore the ad rate. With a hotel room too, you often have captured attention. A free wi-fi access would give you the mechanism to track the effectiveness of the ad by click-through.
12th March, 2008 at 10:06 pm
Martin
I think some hotels in Las Vegas offer ‘free rooms’ as as incentive to get punters in. In this case, the ancillary revenue - the guest’s losses - will more than cover the revenue lost from the room rate.
One sector where Anderson’s latest theory might work is cruise. A free cabin, but you pay for drinks, food, facilities. No popping out to the local supermarket if you’ve 300km from shore.
Or how about a mash-up - gambling-led cruises?
12th March, 2008 at 10:21 pm
Dan - having stayed in Etap rooms myself, I can see that they would probably be the kind of places where you could get away with having an advert on the walls of the room - I think that at a certain level of the market, you might just accept that as part of the ‘cost’ of a cheap room.
Martin - thanks for the info on Vegas. I thought that this must be happening somewhere but couldn’t put my finger on exactly where. Also an excellent suggestion about cruises!
21st March, 2008 at 1:56 am
[...] Interesting post on the Highland Business Research blog, dissecting the latest muse from Chris Anderson (for it is he, man of the Long Tail fame). [...]
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