What price Wi-Fi?

When I was in grad school in the early 90s, it was a big deal when the business school installed a mess of new pay phones — directly addressing a bottleneck that frustrated MBA students trying to contact would-be employers. Now, of course, that seems awfully quaint. But there is an interesting point of comparison to be made between pay phones and wireless internet access. Back in the day, no one expected a cafe or bar to have more than one pay phone. Only locations like airports and hotel lobbies had large banks of pay phones. And they were pay phones, i.e., they by definition weren’t free.

So why is there an expectation that a large range of service establishments offer Wi-Fi service gratis? A recent New York Times article doesn’t grapple with that question directly but it does document the difficulty that airlines, airports, and hotels are having in keeping up with the demand for internet access (Craving Wi-Fi, Preferably Free and Really Fast, Apr 30). One of the points the article makes is that it’s hard to get people to pay up for access on planes — only about 5 to 10% of passengers use the service. Now one can imagine several reasons for this. First, it can be relatively pricey to log on in the air (sometimes close to $20). Second, depending on the airline, availability can be spotty. If you are not sure whether you are going to be able to get on-line, you do the important stuff you have to get done before getting onboard. If Wi-Fi turns out to be available, you then have the prospect of having less important things to take care of but facing a stiff fee. Finally, the service on airplanes ain’t exactly blazing fast. It’s OK for sending an email but not so great for watching a movie.

Airlines aren’t the only one’s having a hard time getting customers to pony up for Wi-Fi access.

Airports and hotels are confronting a similar situation. Of the 10 busiest airports in the United States, those in Los Angeles, Dallas/Fort Worth, Denver, San Francisco, Las Vegas, Phoenix and Charlotte, N.C., offer at least some free Wi-Fi service.

But the trade-off can be overloaded networks that frustrate passengers, which is why Hartsfield-Jackson Atlanta International Airport — the busiest in the United States — is upgrading its infrastructure before switching to free Wi-Fi this year.

“Our system wasn’t built to accommodate the number of customers we expect to have with the free Wi-Fi,” said Myrna White, a spokeswoman for the airport, which dropped its Wi-Fi fee to $4.95 a day last fall.

It is the trade-off between price and congestion that I find most interesting.

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Take that back! New twists in managing customer returns

It is the holiday shopping season so it will soon be the post-holiday returning season. Dealing with returns imposes serious costs on retailers. What are steps firms can take to control how customer return products? Is a Big Brother approach reasonable?

While the Children’s Place only requires an ID for a return without a receipt, a growing number of stores, including Victoria’s Secret, require that you let them scan your ID to return an item with or without a receipt.

According to the National Retail Federation, 62 percent of retailers have ID requirements. Among those who have similar policies for returns are The Finish Line, Home Depot, Target and more.

So where does your information go? Likely it’s being stored on The Retail Equation, a service which tracks how often you bring stuff back and identifies habitual returners. …

Return items too frequently, and you may lose your right to bring back your purchases anywhere.

This is from ConsumerWatch: Stores Requiring ID, Tracking To Prevent Repeated Returns (KCBS, Nov 20). Here is the full video so you can get your outrage and paranoia really racing.

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Add ons at Amazon: Forcing customers to bundle

It’s a big week for on-line shopping so I thought I would discuss an Amazon program I stumbled across this weekend. My goal was to order a simple kitchen brush. A quick search showed that Amazon carried the product and that it was in stock. But there was a catch. Check out that little tag in the picture below stating that this is an “Add-on Item.”

So just what does that mean? Here is how Amazon explains it:

The new Add-on program allows Amazon to offer thousands of items at a low price point that would be cost-prohibitive to ship on their own. We’ve kicked off the Add-on program with thousands of new Add-on Items, and we’re adding more each day. Add-on Items ship with orders that include $25 or more of items shipped by Amazon, and you can get them delivered to your doorstep with free shipping. …

If you have an Add-on Item in your cart but less than $25 of items shipped by Amazon you can still check out with the rest of your items. When you proceed to checkout we’ll give you the choice either to keep shopping or to check out with the rest of your items and save your Add-on Items for later. We’ll keep your Add-on Items in the “Saved for Later” section of your cart so that you can easily add them to a future order.

Or to put it in a straightforward fashion: Amazon won’t sell me a kitchen brush unless I buy something else.

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Reserving toys

Every now and then I see a popular press article that I feel is all but certain to generate academic papers. I can just instantly picture a conference six months in the future at which some grad student will cite this story as justifying his or her model. Today, I saw one of those stories. It has to do with a service Toys R Us is offering this holiday season. Here is how the AP (via the Huffington Post) explains it (Toys R Us ‘Hot Toy’ List Allows Customers To Reserve Items In Advance Of Holiday Rush, Sep 12).

In the biggest change, Toys R Us, based in Wayne, N.J., will offer a “hot toy” reservation system starting over the next few days – when the company announces its 50 products on its annual ‘hot toy’ list. The reservation system will run through the end of October.

Toys must be reserved in stores – in order to avoid online scammers, Storch said – and customers have to put down 20 percent to reserve the toy.

Once reserved, customers will receive an e-mail notification when the order is available and have until Dec. 16 to pick it up in store. The idea is to help customers avoid a frantic last-minute search for hot toys – such as 2009′s Zhu Zhu Pets stuffed hamsters and last year’s Leapfrog LeapPad tablet – which often run out of stock later on in the season.

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How long do patients wait?

This week’s The Numbers Guy column in the Wall Street Journal looks at how long patients wait for care (Long Medical Waits Prove Hard to Cure, May 25). The setting to have in mind is not how many minutes past your appointment time you spend in the waiting room. Rather, focus on actually getting an appointment to be seen for an ailment or to get a procedure scheduled.

That seems like a fairly straightforward question. One just needs to track how many patients have been referred for a procedure, when they are referred, and when the procedure is performed. The problem is that no one wants to just know what the wait is; they want to manage that wait. That means that targets will be set and comparisons made. That’s where things get tricky.

If you measure how long patients coming off a waiting list have spent on that list, a hospital has little incentive, while under evaluation, to clear those who already have been waiting longer than average. As soon as they are cleared, the hospital’s numbers get worse.

Measure the percentage of patients seen within, say, 48 hours, and those who can’t be seen in that time might instead find themselves waiting much longer, as earlier slots are saved for patients who call up later and can be slotted in the time frame, thus boosting a health provider’s numbers.

Count how many people are on a waiting list for a specialist appointment or nonelective surgery, and the provider being evaluated might change the definition of how long patients have to wait to be included on the waiting list.

Such responses have stymied efforts to cut waiting times and to determine if changes meant to alleviate delays have been effective.

“Any waiting-time measure can be thwarted or misrepresented,” says Michael Davies, an internist and acting director of high reliability systems and consultation at the U.S. Department of Veterans Affairs.

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The Spirit of baggage fees

Spirit Airlines has  made some news this week by announcing some tweaks to their fee structure. Most notably they are increasing the fee for carrying on a bag (they are the only US airline that charges for carry ons unless you consider charging for earlier boarding a form of charging for a carry on). If you carry on a bag and don’t pay for that until you hit the gate, it will set you back a C-note (see, for example, Spirit Airlines to charge $100 for late carry-on bags, Marketplace, May 4). I wasn’t feeling compelled to comment on this until I read Saturday’s Heard on the Street column (One-Hundred-Buck Bag Shows the True Spirit of Air Travel, Wall Street Journal, May 5). It noted the following about Spirit’s $100 fee.

Rather than being a big money-spinner, though, the increased fee is more likely a form of deterrence. It will be an incentive for passengers to pay their fees ahead of time, says aviation consultant Bob Mann of R.W. Mann & Co. This reduces costly delays caused by bottlenecks at the gate.

This is basically the argument that Gady and I make (along with our colleague Achal) in our paper about baggage fees (although we focus on checked bag fees): If providing an ancillary service like checking a bag or providing space in an overhead bin imposes a cost, it is best to charge for it. The goal in charging for the ancillary service explicitly (over bundling it with the main service) is to reduce use of that service (relative to bundling). For more, see here and here.

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Managing Customers: Data hogs and Showrooming

I am teaching service operations this quarter and for the first class I have the students read Frances Frei’s “The Four Things a Service Business Must Get Right” (HBR, Apr 2008). I have in the past said how much I like this article. Now, Frances and her collaborator Anne Morriss have developed the framework presented in that article into a full-fledged book, Uncommon Service: How to Win by Putting Customers at the Core of Your Business. It just came out. The two sentence synopsis of the book is as follows: Successful service firms first must decide at what they are going to be excel while recognizing that there will consequently be some competitive dimension on which they must seriously compromise. The resulting service offering must then be supported by an appropriate funding mechanism paired with well-designed employee and customer management systems.

Part of what I like about this framework is the way it turns up the brightness on two features that are particular to managing services. First, just how you get money from customers matters. When you buy a physical good, there is a clear point of exchange. I give you the cash and you give me the item. Services are not so clean. You may share some expertise with me, and I may or may not have to pay you for that. Indeed, not buying something that would compensate you for your time might be the advice you give me (as in an honest mechanic recommending replacing the whole car and not just the transmission). The second feature is worrying about how customers can muck up a perfectly good service process design. Again, this is something that firms making products don’t have to worry about. Sure, they may allow factory tours, but they make sure the civilians stand behind the yellow line and don’t touch anything.

So as if to coordinate with the release of Frei and Morriss’ book, the Wall Street Journal had two articles this week that hit on these points. One is on bandwidth-hogging smartphone users (Confessions of an iPhone Data Hog, Jan 27). The other is on “showrooming” consumers who look in person but buy on-line (Showdown Over ‘Showrooming‘, Jan 23). 

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American Airlines will pay you to check a bag

OK, so my headline is a little misleading. By “pay” I mean give you 500 bonus frequent flier miles and by “you” I mean elite members of their AAdvantage frequent flier program who happens to be traveling from Boston. Here is how they explain the offer:

Through November 22, 2011, American Airlines will offer AAdvantage® elite status members the opportunity to earn a minimum of 500 AAdvantage bonus miles for checking bags on flights departing Boston Logan International Airport (BOS).

Earning the bonus miles is easy – simply visit a BOS Self-Service Check-In machine on the day of your departure and follow the normal steps to check-in with bags. Check at least one bag under your own name to earn the bonus miles, which will automatically post to your AAdvantage account five business days after you have completed the travel associated with your itinerary. As a reminder, all AAdvantage elite status members are entitled to check two bags free of charge (within current size and weight limits) in addition to earning the bonus miles with this special offer.

There are, of course, a number of caveats (such as the bonus is only for your first bag) but they are, in effect, paying a select group of passengers an incentive to check bags. This strikes me as rather crazy; I can’t quite figure out what they hope to accomplish with this.

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Are baggage fees good for society?

A different sort of post today. This one is about a research paper that Gady and I recently finished with our colleague Achal Bassamboo. The paper is called “Would the Social Planner Let Bags Fly Free?” It deals with ancillary services — things like checking bags or printing boarding passes that service firms provide in conjunction with their main service (i.e., flying a person in the case of an airline). What is notable about this paper is that it is the first paper to follow directly from this blog. In essence, the paper compare the relative merits of two quotes that have appeared here in The Operations Room.

The first quote is from Michael O’Leary, the CEO of Ryanair and it appeared in something Gady wrote. (It should be clear from this why we refer to this paper as Fee to Pee.)

Like, paying for checked-in bags: It wasn’t about getting revenue. It was about persuading people to change their travel behavior—to travel with carry-on luggage only. But that’s enabled us to move to 100% Web check-in. So we now don’t need check-in desks. We don’t need check-in staff. Passengers love it because they’ll never again get stuck in a Ryanair check-in queue. That helps us significantly lower airport and handling costs.

Now we’re looking at charging for toilets on board—not because we want revenue from toilet fees. We’d happily give the money away to some incontinent charity. What it means is, if by charging for toilets on board, more people would use the toilets in the terminals before or after flights, I could take out maybe two of the three toilets on board, add six extra seats and reduce fares across the aircraft by another three or four percent.

The second quote appeared in a post I wrote about Spirit Airlines starting to charge for printing boarding passes at the airport (which Ryanair was already doing). It is from Ben Baldanza, Spirit’s CEO.

“We believe it is important to let customers decide what is of value to them,” said Ben Baldanza, Spirit’s chief executive. “Imagine if you went to a restaurant and all the meals came with dessert. That’s great if you like dessert but, if you don’t, you would prefer the option to pay less for the meal and not take the dessert.”

Note that these are fundamentally different rationales. Ryanair’s O’Leary is saying fees are shaping behavior to lower costs and those saving can be shared with customers. Spirit’s Baldanza is basically talking about segmentation. He’s creating a pricing menu that may give some customers a break but is mostly going to extract extra cash from customers who value or need ancillary services.

So do either of these explanations hold water?

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Pulling the plug at Starbucks

This summer I added the Starbucks app to my phone and can now pay for lattes with it. This has had the unfortunate consequence of driving home just how much my family can spend on over-priced coffee as I now get multiple emails per week as the card paired with my phone gets reloaded. So far, it has been easier to just pay then take on two kids who are getting out of day camp and want a treat before heading home.

What does this have to do with operations? It all comes back to why Starbucks is so expensive. Frances Frei in her great article “The Four Things a Service Business Must Get Right” (HBR, Apr 2008) gives Starbucks as an example of a firm that has built around a clever funding mechanism. Anyone can sell you a cup of coffee; Starbucks offers you a third place with nice music, WiFi, and leather seats. All that has to be paid for but you can’t price it directly. Therefore, you get overpriced lattes.

But there is a complication: Starbucks cannot regulate consumption of its various amenities. One latte can buy a lot of WiFi, which gets us to this nugget from NPR (Lingering Laptop Users Wear Out Starbucks Welcome, Aug 9):

Starbucks wants its seating back. Some coffee shops in New York have started blocking their electrical outlets. They want to set a time limit on customers with laptops. Starbucks offers WiFi access and some customers complain they can never find a seat because students, freelance workers and others sit there all day.

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