Southwest Airlines has long been a darling of consumers. With low fares, a fun inflight experience, and an irreverent corporate attitude, what’s not to love? And while most airlines now charge for baggage, in its maverick way Southwest makes the fact that it allows 2 free checked bags per passenger the centerpiece of its advertising campaign.
So it came as a surprise when its CEO, Gary Kelly, recently hinted that it may join the pack and start charging for baggage. While this is a big change for the airline, more importantly it signals a new pricing strategy trend for the future. After all, if the airline that many consider to be a consumer champion can get away with nickel-and-diming consumers, why shouldn’t other companies do so, too?
Nickel-and-diming customers (or as I prefer to call it, a la carte or unbundling) is by now a pretty standard way airline companies can unleash new profits. All of the ancillary fees related to flying from one location to another (telephone reservation, baggage, early boarding, preferred seats, food, pillows/blankets) really do add up. IdeaWorks, an airline revenue consultancy, estimates that consumers will pony up $42.6 billion worldwide for these extras in 2013.
A close friend recently shared his feelings about all of these extra fees. “I’d rather just pay one price for everything – I hate feeling gouged for every little thing,” he complained. And while I’m sure many travelers share his feelings, it’s also important to consider the alternative. I recently booked an impromptu round trip flight from Boston to Los Angeles for $300 – that’s incredibly reasonable. If airlines were to bundle all of these extra services into one base fare, my ticket price would have been significantly higher for things (like pillows) I may not even want.
In reality, a la carte pricing provides a low cost option to enjoy a product as well as allows customers opportunities to pay if they want more. On my trip to Los Angeles, for instance, I have the options to pay a one-time fee of $25 for a telephone reservation as well for each segment of my flight: $60 for 2 checked bags ($120 roundtrip), $99 for a “choice seat” ($198 RT) $10 for priority boarding ($20 RT), and $10 for an on-board meal ($20 RT). That adds up to $383 roundtrip!
When it comes to a $300 build-from-a-base fare vs. a $683 all-inclusive price – I’ll take a la carte pricing every day.
After several years of being cautious with their pricing, companies are now trying to charge more. A la carte pricing is a key strategy to consider as it provides two important benefits:
Broadens a Customer Base. A draconian across-the-board price increase forces customers to make an uncomfortable “take it or leave it” buying decision. Inevitably, some customers will decide to “leave it” – resulting in a loss of sales. The beauty of a la carte pricing is if a price boost is too much, customers can make it more affordable by foregoing a few options. The result is a more robust customer base ranging from the thrifty (those who just buy the base product) to high rollers (“I’ll take every single extra you offer”).
Compassionate Messaging. During this era of economic struggle, consumers are sensitive to price increases. As a result, the message supporting a price increase rollout is critical. It’s important to offer both the full bundle (at a premium) as well as a la carte prices. By offering both, you are communicating to customers that while prices have to go up (for the full bundle), you are being respectful of their financial circumstances by providing choices to reduce price. I’ve found this simple message engenders goodwill with customers and as a result, reduces the risk of backfire.
Of course, there’s a fine line in deciding how many services to make a la carte. One such company that may have ventured too deeply to the dark side is Spirit Airlines. In 2012, for instance, Spirit’s average ticket-revenue-per-passenger was $75 while the average a la carte fee it collected per passenger was $51.39. This focus on collecting extra fees has generated considerable consumer ire. That said, the financial results are impressive: Spirit’s revenue increased by 88% from 2009 to 2012.
Whenever I pitch the notion of a la carte pricing to managers, the reaction is predictable: palpable fear and groans of nickel-and-diming customers. But this strategy actually has plenty of upside benefits. And let’s face it: If Southwest Airlines can move to a la carte pricing, your company can too.