Upgrade Bidding

Part
01
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Part
01

Upgrade Bidding Industry Data

EXECUTIVE SUMMARY
There is significant usage of bidding on upgrades in the Travel Industry, predominantly in the Airlines industry subset as a whole. However, Virgin as a pioneer has recently started upgrade bidding services with their railway operations in the UK. However, the Total Addressable Market for Seating Upgrade Bidding in the Airlines ancillary services space, in which this is a special feature, is approximately $20.55 billion.

Here, we attempt to provide as much precise data in relation to the Upgrade Bidding industry.

PREMISE
Seat upgrading, as a feature, has, until recently been exclusive to the Airline industry and is offered as a premium feature in most leading airlines. This feature also allows airlines to increase their revenue per customer with the allure of exclusivity to those who were willing to go for it.

Leading airline operators use this feature as part of their a-la-carte services, which are a key revenue driver for the airlines, the others being commission based revenues, frequent flyer programs and advertising revenues.

UPGRADE BIDDING- INDUSTRY SPLIT
As mentioned, seat upgrade bidding had been exclusive to the Airlines industry until recently, when Virgin Trains began testing the waters with seat upgrade options with their railway operations in the East Coast of UK. Considering the fact that this is still in its initial stages and the scale is minuscule, we assume the seat upgrade bidding industry is confined to airlines at the moment.

SEAT UPGRADE APPS- QUIRKY DIMENSION
Any unique feature in a high volume transaction-based industry like airlines is sure to be supported with considerable technology that enables ease of access.

For example, apps like Pogoseat, Seatfrog and Gigaom offer sports companies the opportunities for their fans to successfully bid on seat upgrades when they are flying to watch their favorites' games. This offers a quirky perspective to the entire seat upgrading industry. It is, however, uncertain as to the incremental impact of this specific feature to the success of the process as a whole.

REVENUE IMPACT AND SUCCESS
Of the reported annual revenue of the airlines industry in 2017 of $824 billion, the airlines ancillary revenue in the same period was an estimated $82.2 billion, a solid 10% of the reported annual revenues of the industry as a whole.

Out of the 4 primary classifications of airlines ancillary services, a-la-carte services are pegged at 25%. So it is safe to assume that the market for airlines ancillary services, of which seat upgrading is a part of, is as follows:
$82.2 billion * 25% = $20.55 billion

As data for seat bidding alone is not available, we assume data from websites and apps that allow access to these services are factored into this market share as well.

However, previous trends indicate that leading airline operators like United and Delta make anywhere between 16-25% of their ancillary services revenues from up selling/seat upgrading. It is hard to pinpoint the impact of this feature on the overall revenues of airlines at this point. However, as with available resources, seat upgrading remains a vital factor that drives revenues in the airline ancillary services space within the airlines industry as a whole.

CONCLUSION
It is safe to assume that of the contribution of a-la-carte services amongst the airlines ancillary services landscape, to the tune of an estimated $20.55 billion, seat upgrading services and bidding procedures assumes a significant part of revenue generation. It would still need to be ascertained as to what proportion amongst the a-la-carte services would these services contribute.
Part
02
of two
Part
02

Upgrade Bidding Psychology

Psychological aspects related to online auctions include the endowment factor, competition, fear of losing/joy of winning, bidding anonymity, concept of scarcity, commitment, and the herd effect. Below is an overview of each factor.

Summary

There are no published reports or studies on the psychology of bidding specifically in regard to upgrades. Quite a few studies have been done regarding the psychology of bidding in online auctions. However, the most recent studies date from 2007-2013. While the studies are older, a lack of recent studies may indicate that results have not changed. The research criteria did not define whether the focus should be on general consumer psychology or from the perspective of the business. Therefore, we included an overview of both.

Endowment Factor

When a person places a bid on an item, in essence, they already feel like the item belongs to them. If another person outbids them, there is a sense that the item has been ‘stolen’. This feeling of ownership causes the person to have an emotional connection to the item. They feel offended that someone outbids them.

Competition

A study by researchers from Princeton showed that competition plays a big role in auction bidding. In a fake auction setting, some volunteers in the study were told they were bidding against a computer while others were told they were bidding against other people. The volunteers that were bidding against others bid higher and more irrationally than those bidding against the computer.

Fear of Losing/Joy of Winning

Another study by Mauricio Delgado at Rutgers University used brain scans to monitor bidders as they won or lost auctions. The scans showed that when a person lost an auction the activity in the striatum part of the brain fell. When the person won an auction, the activity in the striatum increased. However, further in-depth study revealed that the perceived fear of losing had the most impact on how the person bid and resulted in over-bidding more frequently.

Online Bidding Anonymity

Online auctions and apps provide a level of anonymity that may make some bidders bid higher for items. When a bidder does not know anything about the person bidding against them, they feel they can bid more aggressively.

In an Ohio State study, volunteers bidding on items in a series of auctions were provided with competitor profiles. Bidders tended to bid lower when they thought they were going against someone in their demographic. They bid slightly higher against someone with a different demographic. They bid the most when the profile was anonymous.

The University of South Carolina held a similar study with two fake auctions. One was titled 'eBay Auctions' and the other was
'Gamecock Auctions' with the Gamecock the school’s mascot. Results were similar to the Ohio State study showing that participants bid lower on the Gamecock Auction site when they believed other bidders were their college peers. They, also bid higher against the anonymous eBay Auctions competitors.

Scarcity

The concept of scarcity can influence a person’s decision on auction bidding. If the bidder believes there is only one or a very limited number of items (such as first class upgrades), there is a tendency to bid higher. Another concept of scarcity involves the time allotted to place bids. Bidders realize they only have a certain time frame to make a decision on pricing which could generate a ‘bidding fever’.

Commitment

Initial pricing strategy can have a huge outcome on the final auction price. At one time there was a belief that a high first bid on an item would set the tone for the auction. This is called anchoring. A high first bid would show the value of the item and spur others to want it. This theory does not seem to hold true in online auctions. A study by The Kellogg School of Management and The London Business School found that online auctions with a low starting price generally resulted in a higher end price. In addition, the low starting price with smaller incremental bids required drew people to bid on the item more often, increasing the bidder’s commitment to the auction and the item.

Herd Effect

The low pricing strategy tends to lead to more bids, more unique users and more traffic. When bidders see an item with a lot of other bidders there is an increased implied value. It makes others want to bid on the item also This is sometimes called the ‘herd effect.’ People think that the bidders ‘know something that they don’t.’ By lowering the barriers of pricing, the increased number of bids and unique bidders will draw others to want to participate.

Conclusion

Psychological factors that affect a way a person bids on online auctions include the endowment factor, competition, fear of losing/joy of winning, bidding anonymity, concept of scarcity, commitment, and the herd effect. Structuring an online auction to play on the concept of scarcity, commitment and the herd effect can increase traffic, the number of bids, and final price.

Sources
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