Tuesday, August 23, 2005

Ameniti Revisited: United’s “Vapor Service”

A few months ago, I favorably reviewed Ameniti from United. I now take a second look.

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I was looking at my <a href="#">referrer listWeb pages from where peopleclicked through to my site.</a> for this site today, and have an interesting statistic for you: 25% of my search engine traffic comes from the search results for the word “Ameniti.” A few months ago, I had written <A HREF="http://www.brutalclarity.com/index.php/more/ameniti_new_loyalty_concept_from_united/">a tiny article</a> about the launch of the <a href="http://www.ameniti.com">Ameniti Club by United Airlines</a>, and some of the features it provided. I had, without reading the fine print, suggested that it was a good deal, and that it was worth considering. Well, I was wrong. Ameniti is essentially a simple, prevalent marketing scam, run by hundreds of companies around the world. It relies on three things to make its numbers and insane amounts of profit: 1) Annuity revenue. 2) Breakage. 3) Slick, beautiful brand marketing. They are purported by large, solid companies, and are considered standard business practice. They prey upon two things: one, a consumer’s tendency to overestimate product usage, and two, his inability to decipher fine print in the face of a glossy, beautiful brochure or Web site. It hurts me to say this, because I am responsible for some of those slick, beautiful brand marketing messages. However, I have a simple theory around service offerings that don’t add value: great marketing for a bad product will just put you out of business faster. Think of it in terms of a simple graph. On the X-axis is Adds Market Value. On the Y-axis is Gains Market Share. If a business adds a ton of market value, but doesn’t gain much market share, then it is ripe for a great marketing idea, and has unrealized revenue potential. On the other hand, if a business gains tremendous market share but doesn’t add much market value, at some point, the inflated value will correct itself—very suddenly, and very quickly. I call this a “vapor” service or product. The ideal situation is for an offering to add market value while incrementally gaining market share. No company better epitomizes this strategy, in my mind, than Google. One of the reasons for their explosive growth is that they continue to find ways to add market value while they gain market share in search. They do this by <a href="http://www.google.com/intl/en/options/index.html">continually adding services</a> that extend their brand proposition of bringing the world’s information to your fingertips. So, why is Ameniti a scam? Because it doesn’t work. Let’s break it down. You start by paying a $295 fee per year, which is pre-paid. For that amount, Ameniti claims to provide several luxury travel services. The highlighted ones are: A free companion ticket every time you buy a ticket on United Airlines. (I know, that sounds fantastic.) Automatic membership in Starwood’s Preferred Guest Program at the Gold level. 25,000 bonus miles per cabin every time you book a cruise on select lines. 24/7 access to a “Global Concierge” service. Free membership in Hertz’s Gold Club. They have a few other benefits, but for the sake of our analysis, these main ones will do. Let’s start with the one they highlight as the hero—a free companion ticket every time you buy a full fare ticket on United Airlines (economy and up for North American travel, business and first for international.) Now, at first glance, this seems like a fantastic deal. The marketing positions the proposition brilliantly, namely, taking your spouse or significant other on a business trip with you. This makes sense, since 90% of personal travel purchases within the United States are done using discount airfares; however, companies tend to sometimes allow the purchase of full fare tickets. This is where the fine print comes in. Turns out that even on full fare tickets in Economy, you still need to make sure that your ticket is not under United’s E,M,U,H,Q,V,W,S or T Class. Which doesn’t mean much, right? So, I ran a little experiment tonight. I checked online fares on ual.com for a round-trip from Chicago to New York for this coming weekend. I got a price of $485 per ticket, on a W class ticket. I then called Ameniti and asked them what a full fare ticket would cost me on the same routing. The price was $1392. Finally, I asked my corporate travel agent what a full fare would cost me on the flight. She came back with $755. I wanted to give the club the benefit of the doubt, and thought that perhaps it would be better for international travel booking. And so I went to UAL.com and checked on tickets from Chicago to London, starting September 6th. The price was $707. The same seat, full fare, would cost me $2495 to avail the Ameniti benefit. Why do companies do this? The economics of the vapor service are simple. Let’s say the acquisition cost per customer is $50. Revenue from the customer is $300 (rounded). Since the cost of running the club is limited to the personnel that need to service the customer and general G&A, the club has a relatively fixed (or scaling) cost structure. So, at 50,000 members, revenues just from subscriptions are now at $15,000,000. The cost structure to service this base is surprisingly small—less than $50 per customer per year. How? By outsourcing the call center to a professional concierge and call management company, and keeping a lean management team. That means, after $2,500,000 for customer acquisition, an additional $1,000,000 for general marketing, and $2,500,000 for servicing and G&A, the initiative makes an amazing profit of around $9MM per year. That’s a PBT of over 50%! This number only goes with up more customers signing up. Also keep in mind that the consortium companies like United end up making higher margin sales as a result, because they encourage members to buy full fare tickets to take advantage of their membership. Other participating companies like Starwood have a steady stream of members into their <a href="http://www.spg.com">SPG program</a>, where they’ve proven to increase revenues by auto-granting certain members Gold and Platinum status. Mass-funded services like Ameniti can, in fact, work. For instance, American Express’ Platinum card is an excellent example of a set of services for an annual cost that, if used well, can pay back massive dividends to customers. Of course, they run the same free companion ticket scam as well, but their additional benefits more than makes up for that treachery. The trick, as a consumer, is to make sure you sit down and do the math. Even if Ameniti’s airline costs gave you a small discount from buying two separate tickets, you still need to figure in the sunk cost of $295, plus the additional costs involved with using the service. For example, if you’re flying to London, and want to use Arrivals by United (essentially a tiny bathroom with showers, and ironing services,) does their “nominal” fee of $50 make sense? Instead, you should consider using that money for a nice meal, or use it go shopping. Now, if you’re really hell-bent on trying out Ameniti, use <a href="https://www.ameniti.com/ac/browse/joinSpecial.ac?pr=ACBAN1-2798">this link to a 3-month trial</a> for $10. Please remember to cancel before the 3 months are up, or else you’ll get billed for the full $295. Do they think you’re stupid? In fact, they do. Ameniti, in the end, is a marketer’s nightmare. It is ridiculously easy to sell that kind of stuff, because, you (dear consumer) are gullible as hell. You take marketing bait without thinking twice, and we count on you doing that. But when the product has no chance of living up to expectations that marketing sets forth, angst is sure to abound. Like I said, great marketing is the fastest way for a bad concept to go out of business. http://www.brutalclarity.com/index.php/66/
 

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