United Airlines is rolling out TVs on the back of every Boeing 737 airplane seat. Soon 200 of its airplanes will be equipped. I got on one of the upgraded airlines on Friday and another on Sunday and was reminded of my recent post about the ubiquity of televisions. However, a funny thing happened on both flights. Almost no one watched TV!
When I get on a JetBlue flight, which has free TV, almost every seat back is tuned to a different channel and most of the passengers are watching. On my Sunday flight, which took about 2.5 hours, I counted just 1 person out of almost 100 watching. All the rest of the seat backs were showing the same short endless loop of forgettable commercials. I didn’t count on Friday, but in the rows around me, no one had purchased TV.
The big difference between the two airlines is that TV on JetBlue is free, while United was selling TV. The cost on United is $7.99 for flights over two hours, but there are some discounts if you pay for TV ahead of time, or if you purchase TV on one flight for multiple seats using the same credit card.
United is supposed to be in the business of making money. However, the $8 price seems wildly off base. United has various size 737 planes. An estimated average of their seating configurations suggests that the typical United 737 has about 140 seats in coach. At a 1% take-up rate this means about 2 people purchased TV on the plane for an extra $16 of revenue. Wow, that isn’t very much!
If United had dropped the price to a $1 a seat, the number of people watching TV would have soared. I don’t know the exact numbers since United has not asked me to consult for them. My guess is $1 would result in a 90% take-up rate, which is $126 of revenue.
I constantly tell my MBA students that profit maximization is the goal when running a business. However, if you have a business that only has a fixed cost (like seat back TVs) and the additional cost of one more user is close to zero (like seat back TVs) then the goal is to maximize revenue.
To maximize revenue United needs to do some relatively simple experiments. Instead of having a fixed price model, they need to vary the price on different routes to see what price-takeup combination results in the most revenue. The optimal price is clearly less than $8 a flight segment. Why? Because most of us watch a lot of TV and we don’t value an additional hour very highly.
Dropping the price would result in a win for customers (more entertained) as well as United (more money). It is not often in life that both sides win when a company lowers its price, but this is clearly one of those cases.
PS: If someone from United is reading this feel free to give me a call or send me an email. I am happy to talk further.