“We can’t do that! It’s not how our industry works!” I have heard those comments many times in my career. Unfortunately, it usually means whoever I am talking to does not have the confidence to be innovative. On the other hand, airlines have shown over the years a strong willingness to try new pricing paradigms; and when that pricing creativity works, the competitors follow. I was reminded of that when I saw this article in the Wall Street Journal.
Airlines have been creative out of necessity. The industry has been plagued by significant losses from too much capacity and high cost structures, so creativity has been required to generate more revenue. Airlines were the first to practice yield management in the late 70s and early 80s, which combined inventory control, demand forecasting, and estimates of price-sensitivity by segment in order to offer differentiated prices, including non-refundable to various customer segments. One airline had to take the risk to try that first, and most accounts credit American Airlines with doing that. The result was they generated more demand from the price-sensitive leisure segment without reducing revenue from the business segment.
More innovations have followed. Most of us can remember the time when food was included in the price of a plane ticket, but one airline (I don’t remember which) was convinced they could eliminate free food and sell packaged food for an extra fee. Although that was not how the industry worked, once it was demonstrated to be successful, others followed and it became the industry standard. The same was true with checked bags. At least one checked bag was always included in the price of a plane ticket, but American was the first competitor to charge extra for the first checked bag. Although some AA employees said “We can’t do that!”, and believed they would lose customers, the practice is now industry standard.
Most airlines now offer upgrades for extra fees. Those can include aisle seats, premium economy seats, exit row seats and early boarding. However, many of those upgrades go unsold. Virgin and El Al are stepping up a notch with their auctions, by letting fliers bid for those upgrades. In some cases the prices for exit rows will be higher than they are today, and in some cases they will be lower. My bet is they will continue to test and adjust the auction concept.
Stephan Liozu has blogged about innovation in pricing, and he and Andreas Hinterhuber published a book about it, Innovation in Pricing. I think airlines are a great example of innovative pricing, and I like this latest auction concept. For those who think “It’s not how our industry works”, watch the airlines for some good examples of creativity.
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[…] year I wrote a blog, Innovation in Pricing – Watch the Airlines. In that article, I described how the airlines ignored the “We can’t do that” mentality and […]
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