What would it take to persuade business travellers to take cheaper flights?
Business travellers face their own version of moral hazard. A solution may be at hand
By A.W. | WASHINGTON, DC
THE principle of “moral hazard” is well known to economists. It refers to the idea that people act differently when they are not fully exposed to an action's costs. (An often cited example is that people with good house insurance will be more likely to leave their doors unlocked.) Business travellers face their own version of moral hazard. When a company is footing the bill, the temptation is to spend more on flights and accommodation than is needed.
A new startup thinks it has a solution. Upside, which has been launched by Jay Walker, the founder of Priceline, a big travel site, will offer gift cards to business travellers who are willing to save their employers money by, for example, staying at a hotel farther from the centre of town or flying at a less popular time.
It is a nifty idea, although it has its downsides. Many travellers prefer not to cut corners on business trips, particularly if it means spending longer in the air. (Mr Walker told the Skift website that “There is pretty much no business traveller who is coming home and can’t afford to make a stop if they want.” Road warriors may beg to differ.) They also might not be hugely tempted by the $100-200 gift cards for retailers they may not even frequent. And for their part, employers may be unimpressed by the small cost savings, estimated by Upside to be 5-15%—particularly if staying in less convenient hotels means shelling out extra for cabs or Ubers.
Still, the principle is an intriguing one. And it extends far beyond travel. America’s explosive health-care costs, for example, can be partly attributed to moral hazard. Because insurance companies bear most of patients’ medical costs and doctors profit from suggesting more pricey interventions, there is an incentive to over-test and over-treat. That is why there is increasing interest in offering financial incentives to patients who choose less expensive treatment options.
Of course, business travel is not the same as health care. When time and money are on the line, accepting a less optimal flight could be the difference between securing a deal and not. But then again, the stakes are lower too. Business contracts can hinge on travel arrangements, but lives generally don’t. If patients can be persuaded to take a chance on cheaper treatments, then surely business travellers can too.
Upside, which will have its beta launch in about ten weeks, will hope so. The service is aimed primarily at small to medium-sized businesses; it will need to scale up quickly in order to turn the $35 it charges per trip into a profitable venture. Success could hinge on its algorithm. Upside will work with databases such as Expedia to build a system that will find alternatives to pricier to travel options. Furthermore, it aims to negotiate lower rates for flights and hotels than the publicly advertised ones. The plan, Mr Walker says, is to analyse “all the flights, the connections, the tradeoffs you can make and present them to you in really simple choices on a phone so that you can say, for $80 I would do that, for $50 I would do that”. If that fails, he could always send round a karate-chopping William Shatner to persuade them. After all, that seemed to work for his previous firm.
