How does Priority Pass stay profitable?
 

I used my PP at an airport restaurant today. Overheard a conversation between a waitress and another customer, and she said they get $24 for every PP visit, which is a lot more than I would've guessed. She went on to say they used to only allow outbound flyers, but because accepting PP is too good of a deal to pass up, they now allow inbound use as well.

So, I totally understand the merchant side of the equation, because for every PP user that orders $28 worth of food/beverage, they get a flat $24 fee, which only a 14% discount. Especially when someone orders less, the restaurant still receives the fee in full.

It's the PP side of the math that I don't understand. Throughout the year I used my PP at least 25 times (and always +1), so the cost of having me as a member for PP should be more than $1200. And this makes me curious: who's paying for this? Most people get PP through credit cards, including me. I'm sure the annual fee contributes, but all cards that come with PP have lots of other perks as well, and I don't see a large portion of the $450 being spent on this. Or are there just too many people who have PP but never use it? Wonder if anyone's familiar with their business model.

Its probably another one of these new age business models where earnings are not important, only the size of the network (and consequently a generally positive public perception) are important. Look at Uber... it's a valuation game, not an earnings game.

The vast majority of memberships, subscriptions, "unlimited access" plans work pretty similarly. It's about getting the membership dues and renewals. Many users will use the benefits front-heavy, seeing a huge value. Then continue to pay for it and not use it as much later. Some people just never use it at all. If the program becomes unsustainable, they make changes behind the scenes to make it profitable. The Priority Pass Plus includes 10 visits for $250. The average user is just not going to use it more than 10 times.

The real question is how long the credit card companies will continue to pay for this benefit and/or in its current form. This relationship seems very beneficial for Priority Pass, minus the explosive growing pains that needed to be addressed very quickly.

99% of sales are to businesses not end users

same applies in many industries, different from user subscription industries, although those also do partnerships

No, it's an actuarial model. Priority Pass is owned by an insurance company. They know how to set the cost of membership (individual, corporate or bank sponsor) to recover their costs based on average usage projections. Individual usage isn't very important if the number of members is large.

Priority Pass recently increased the published guest fee from $28 to $32. Even if you do not pay the guest fee because your membership includes two guests per visit, it tell us that Priority Pass is likely raising the price they charge banks for these memberships.

I speculate that Priority Pass is offering different reimbursement rates to restaurants than to lounges, and likely not the same rate to all restaurants. The restaurant aspect of their business is new, and they will be testing different arrangements.

That makes sense. So you mean the cost incurred by each visit is mainly covered by the bank? For some reason I always thought banks only give PP a flat fee, but I guess that could be wrong.

In that case, since I have multiple PP from multiple banks, maybe I'll try splitting my lounge visits between different cards.

Another example of a business model like Priority Pass' is streaming video. The key for Netflix and similar is to charge customers enough to cover their costs (mainly the amount paid to the studios for each movie/TV show played and the infrastructure to enable streaming) but not too much where it dissuades people from signing up. This is possible because nowhere near all of their customers are going to constantly be streaming stuff.

That said, I'm sure more people than expected are using PP, hence moves by various issuers to limit free guests and otherwise control usage.

They may, but if they do that it means Priority Pass collects fees for many members who never (or very seldom) visit a lounge. It doesn't matter (to us) if Priority Pass charges the bank per member, or per visit, as long as they generate sufficient revenue in aggregate to more than cover their expenses.

OP is correct that if the average credit-card-PP member had similar usage levels to them (50 visits/yr), the business model wouldn't work, no matter if the banks paid a flat fee per member (PP would be hurting) or per visit (the banks would be losing money). But the average is likely much lower. Especially for members with no lounge in their home airport.

I have two PP cards myself (CSR and Citi Prestige), and I'm not sure I've used either in 2018. I was traveling heavily in Q1, but between MSY (no lounge) and DCA (has choices now, but didn't until this summer). Since then, my travel has dropped way down, and my most recent attempt to use PP was thwarted (Minute Suites was completely full). In the couple of years prior, I probably averaged one visit every month or two.

I find the adding of restaurants quite strange and I think that these in particular are likely to be costly to Priority Pass. The company has been around a long time though, so I'm sure they have plenty of histrical data to enable them to crunch the numbers to work out pricing structutes and they business model.

I think of it differently.

If a PP user can't get into a lounge with their card, then the utility of the card is gone - actually, it's worse because the expectation is to get access, and being denied leaves a bad taste. If that customer then cancels the credit card that provided the card, then their value proposition to credit card issuers becomes less and they will lose the issuers and their payments. There are lots of complaints of being turned away from a PP lounge on here.

Providing many chances to use PP at an airport is great for them, as it gets people using the product. As long as the average number of visits per account is below their cost, they are profitable. And if if too many people do use the card, they can re-negotiate with the banks and show that they have satisfied customers! Unlike FlyerTalk visitors, not everyone will arrive 6 hours early and visit every PP restaurant possible!

Adding more capacity for end-users makes the PP card more useful (and more reliable), and therefore more valuable for the card issuers, and thus allow PP to build their business.

Priority Pass must think along similar lines to you, hence their continuing to add restaurant options.

And this's definitely great to us users. Honestly, with abysmal food offering at most US lounges, I'd rather have a real meal at restaurants. Of course, I don't usually fly high-delay airports, so I could be biased here. Just wish the restaurant deals are sustainable given the high fee paid, so that we can continue to have these options (or even more added).

Additionally, I'm not sure PP can actually add many new US lounges in the short to medium term considering the age of some domestic airports and the lack of available space. Restaurants are a good stopgap until the needed renovations/terminal replacements can come online.