Two weeks ago I wrote a blog post, Don’t Get Angry About Prices– Change Your Buying Behavior, in which I opined getting angry about pricing accomplishes nothing. Shortly thereafter, I read an article in the Washington Post, Do Airline Tickets Need Warning Labels?, followed by JetBlue and United raising their baggage fees. Meanwhile Southwest still doesn’t charge for checked bags. These things all reiterated my view that companies should compete by differentiating themselves in whichever way they believe adds the most customer value, including transparent pricing or multi-part pricing.
I have written many times that the airlines have done a great job of segmenting their customers and creating offers for varying levels of price sensitivity. Some customers want the cheapest tickets, and they are willing to accept small middle seats, extra fees for checked bags, late boarding, etc. Others want large seats, plenty of leg room, and a price that includes food and alcohol. And there are customers in between those ends of the spectrum. Some customers are willing to pay a premium like an insurance premium or an extended warranty for the right to cancel or change flights without penalty. Others are willing to self-insure the risk of wanting to make a change. Many airlines believe they can add more customer value by offering product bundles that meet those differing customer preferences, albeit with different prices.
Southwest chooses to compete by highlighting their “Transfarency.” They specifically call out their competitors for charging extra for baggage, and they have never assigned seats in advance. Customers who decide to buy from each carrier, or not, will determine which strategy is the best.
Let’s think about other industries. Laptops can be purchased for prices ranging from $300 to several thousand dollars. The features and capabilities of them are not all the same. The computer manufacturers do their own research and testing to segment their customers and determine which features are valued most by each segment. They then advertise and highlight those features. To compare laptops, buyers must do some detailed homework to identify the differences between offers and how important those differences are. Try comparing laptops at Amazon, Best Buy, Costco, and Walmart with Dell and HP online stores. Some that seemingly look the same are quite different. Forcing the manufacturers and retailers to use a standard set of features and compare prices would cost them a substantial amount of money and result in fewer offers, which would likely increase prices and reduce some low-end offers.
Another important point is the manufacturers and retailers make money by offering add-ons, bundles, extended warranties, etc. beyond the base laptop purchase. That is a form of multi-part pricing. It enables customers who value the extras to buy them, without forcing the most price-sensitive customers to buy those things.
Competition among online retailers is intense. They compete based on brands available, breadth of assortment, convenience, price, and shipping costs. While prices are easy to compare, the other items are not, and that fact makes the pricing comparison slightly less relevant. Amazon offers free shipping, if you are a member of Prime, and if the product is eligible for Prime. Other retailers offer shipping at a range of prices, with varying thresholds for free shipping. Customers can decide which feature is most important, and if it is free shipping, they can buy from a retailer who offers it. Again, customer purchases will determine which strategy is best.
In the Stratpricing blog, we have discussed multi-part pricing used by sports, music and theater venues many times. When customers buy tickets to an event, they know that things like parking, food, and beverages will cost extra; however, there is no published price list for hot dogs, beer, peanuts, etc. Customers continue to attend events, and the pricing strategies employed by the venues enable them to make a profit. No regulation needed.
My last example comes from credit cards. It seems like each week I receive a new offer for another credit card. Some offer airline miles, some offer varying levels of cash back, others offer no annual fee, and still others offer concierge services. The banks decide how they want to compete and advertise accordingly. Capital One runs TV ads with Samuel L Jackson mocking the card companies who require customers to sign up for a different high cash-back category each quarter. Consumers get to decide which feature they want, without requiring a standard comparison of all potential features from each card company.
This is not typically a political blog. I write about pricing-related topics, but articles like the one in the Washington Post, which called for more regulation of airline prices, cause me to comment. I notice that politicians compete for votes however they want, with minimal transparency. They seldom lay out detailed positions, and instead they rely on vague sound bites and proposals with incredible undisclosed consequences. They also spread half-truths and lies about their opponents. Lastly, much like the airlines and everyone else, they are self-interested. So, consumers must try to figure it out on their own.
We would all be better off if we ignored the political nonsense and realize we are best served when businesses compete with whatever strategy they think will work best. For some, that strategy will include fully transparent, all-in pricing. Others will use a multi-part pricing strategy. We as consumers can vote on the winner with our purchase dollars. And may the best strategy win.
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