For the most part, the airline industry has been in overcapacity and hostile operating conditions since it was deregulated many years ago. During that time, the industry produced many pricing schemes and even more competitors. Over the last few years, the competitors have decreased, while the pricing schemes have burgeoned.
Many competitors fell away as the industry learned the difficult lesson that all airfares have to be the same or customers will choose the lower cost airfare. TWA, Eastern and Pan American were major carriers who disappeared in intense price competition. Nor did this price competition spare discount airlines. People Express no longer exists, nor does Presidential Airways, among many others.
But the industry learned something a few other industries have also learned. Most customers focus only on the quoted price. They don’t always consider the fees that might accompany their purchase. The airline industry developed an extensive list of add-on benefits for which they charge an extra fee. The list is long and growing. There are fees for checked bags, oversized luggage, priority seating, pets, unaccompanied minors, additional leg room, meals, drinks and snacks. Most of these fees are new over the last three to four years as airlines have found creative ways to increase their revenues by offering a la carte pricing. (See the Perspective, “Discovering Hidden Pricing Power” on StrategyStreet.com.)
These fee revenues have helped the airlines but they have a down-side for the airlines as well. When fees are not transparent, customers learn to distrust the answer when they search for the price of airline tickets. Many customers have learned that the quoted fare will not be the final price they must pay. (See the Symptom & Implication, “Customers are more price sensitive” on StrategyStreet.com.)
Abhorring a vacuum, several companies have rushed to offer information to the consumer about these often hidden fees. Today, companies such as TripAdvisor.com and FlyingFees.com, offer tools to calculate fees for various options a customer may choose while flying. These current tools have limitations. But the travel industry heavy hitters are about to join the battle. The giant, Sabre Travel Network, is about to introduce a broad-based suite of products that will enable travel agents and consumers to specify the services the consumer anticipates using and then see the full price of the ticket, plus the fees, the customer will incur. Further, travel companies are working to standardize the way that airlines include fees in their reservation systems. Some people expect these pricing benefits to be available within the next year. This is very similar to what has happened in the automobile rental industry. An auto renter can easily determine the total cost of the rental before signing on the dotted line.
Until now the airline industry has been able to charge different fees for the same service. For example, a consumer sending an unaccompanied minor on Southwest Airlines pays no additional fee. The same service on Air Tran brings a fee of $39. The service at Continental, Jet Blue and Alaska Airlines costs $75. If you want to fly an unaccompanied minor on the legacy airlines, Delta, American, United and U.S. Airways, the fee is $100.
Much of this pricing freedom is likely to erode as the travel companies bring more pricing information to the consumer. Most consumers will continue to operate the way they have in the past. They will ignore the fees and search for the lowest fare. However, enough consumers will pay attention to the full cost of the airline trip. These people will move their business if prices seem too high for the extra benefits they prefer to buy. This is likely to commoditize the price of these extra benefits.
The airline industry has done the consumer a service with its fee-based pricing innovations. Those customers who wish to fly for the lowest possible price can chose options that have few benefits. Those who want more benefits can chose those and pay for them accordingly. This is a sensible and helpful pricing strategy in a hostile market, for both the airline industry and the consumer.
Monday, March 23, 2009
Thursday, March 19, 2009
Function Innovation in a Service Industry
The advertising industry is suffering along with the rest of us. As marketers in all industries retrench and cut costs, advertising agencies are feeling a margin squeeze. They are looking around for new services that might distinguish them from their competitors and enable them to gain share in a declining market. Some of these new services are Function innovations. (See the Perspective, “How Customers Buy” on StrategyStreet.com.) A Function, in our terminology, refers to the characteristics of the product that affect the way it is used by the customers.
Function innovations are powerful in customer economics but, perversely, may not create an industry winner. The reason is that many competitors will tend to copy successful Function innovations. These innovations are easy to see and reverse engineer, hence, easy to copy.
A new Function must remain unique in order for a customer to make a buying decision based on the supplier offering the new Function. (See the Perspective, “When to Compete on Features” on StrategyStreet.com.) There are three typical patterns that enable a new Function to remain unique:
* A legal or regulatory barrier such as a patent.
* Competitor economics which prevent or discourage a competitor from investing in the innovation.
* A need for external verification that the Function works and is worthwhile.
Interpublic Group’s Deutsch LA invested $60,000 in a research initiative. They interviewed more than 150 consumers to determine how the average consumer was responding to the bleak economy. Deutsch LA named this research study “America’s Wallet.” The company used this Function innovation creatively. First, it brought the findings to bear on its existing clients. This cemented their relationship with the existing clients and probably helped them gain additional work from these the clients as well. Then the company took its findings to clients that it was not currently serving. The study was interesting enough that some clients did come on board and grant Deutsch LA new work.
What has made this Function innovation successful? In this case, the Deutsch LA’s innovation remained unique using all three patterns that typically keep a Function unique:
* Legal barriers: The “America’s Wallet” product is copywrited and unique.
* Competitor economics: The Function innovation was costly and time consuming to Deutsch LA. Other agencies have been slow to copy this innovation in this recessionary market.
* The need for external verification: One new client who came on board due to the “America’s Wallet” product stated in a public forum that this product was really helpful. The product has a bit of buzz.
Congratulations to Interpublic Group’s Deutsch LA for a successful Function innovation.
Function innovations are powerful in customer economics but, perversely, may not create an industry winner. The reason is that many competitors will tend to copy successful Function innovations. These innovations are easy to see and reverse engineer, hence, easy to copy.
A new Function must remain unique in order for a customer to make a buying decision based on the supplier offering the new Function. (See the Perspective, “When to Compete on Features” on StrategyStreet.com.) There are three typical patterns that enable a new Function to remain unique:
* A legal or regulatory barrier such as a patent.
* Competitor economics which prevent or discourage a competitor from investing in the innovation.
* A need for external verification that the Function works and is worthwhile.
Interpublic Group’s Deutsch LA invested $60,000 in a research initiative. They interviewed more than 150 consumers to determine how the average consumer was responding to the bleak economy. Deutsch LA named this research study “America’s Wallet.” The company used this Function innovation creatively. First, it brought the findings to bear on its existing clients. This cemented their relationship with the existing clients and probably helped them gain additional work from these the clients as well. Then the company took its findings to clients that it was not currently serving. The study was interesting enough that some clients did come on board and grant Deutsch LA new work.
What has made this Function innovation successful? In this case, the Deutsch LA’s innovation remained unique using all three patterns that typically keep a Function unique:
* Legal barriers: The “America’s Wallet” product is copywrited and unique.
* Competitor economics: The Function innovation was costly and time consuming to Deutsch LA. Other agencies have been slow to copy this innovation in this recessionary market.
* The need for external verification: One new client who came on board due to the “America’s Wallet” product stated in a public forum that this product was really helpful. The product has a bit of buzz.
Congratulations to Interpublic Group’s Deutsch LA for a successful Function innovation.
Monday, March 16, 2009
An Answer for Pizza Problems?
The pizza industry is struggling. It has been struggling for some time, well before the recession put its icy grip on the industry’s throat. The costs of pizza ingredients have caused the prices in the industry to rise. The industry has always had to struggle with its less-than-healthy reputation. So, for some time, the industry has been losing share to healthier and fresher competition on the one hand, and less pricey hamburger and sandwich competitors on the other.
One company, Domino’s, is responding to these challenges by broadening its menu. It is beginning to sell toasted sub sandwiches in competition with Subway and Quiznos. This is not a promising development for Domino’s.
Subway and Quiznos are already fighting a price war. You have probably seen the ads for “A Footlong For $5” at Subway. The sandwich business, while apparently similar to pizza as a fast-food business, is still a different business than is the pizza business. Other very good fast-food firms have entered different fast-food businesses without success. One notable example is McDonalds. Several years ago, it tried to sell pizza in its stores and failed miserably.
You may see other companies expanding into new businesses that are apparently related to their own business. When you see that, beware. (See the Perspective, “Finding the Open Door” on StrategyStreet.com.) Some years ago a manufacturer watched as its competitors began buying into the distribution channel for its product. In a panic, the company decided that it had to do the same thing or lose its customer base. So it, and most of its competitors, entered the distribution business. The manufacturer had assumed that it would have an advantage in the distribution business because it made the product that would be sold there. Naturally, the distributors who were not purchased by the manufacturers became very upset. In addition, the manufacturers knew little about how to make a success of the distribution business. The result was a very expensive failure for all of the manufacturers who entered the distribution business. The distribution business had different customers with completely different needs than the customers of the manufacturing business. The manufacturers had no real advantages in this business.
Before a company expands into a related business, it needs to be clear on exactly where it has advantages over people already in the business. Otherwise, disaster awaits.
One company, Domino’s, is responding to these challenges by broadening its menu. It is beginning to sell toasted sub sandwiches in competition with Subway and Quiznos. This is not a promising development for Domino’s.
Subway and Quiznos are already fighting a price war. You have probably seen the ads for “A Footlong For $5” at Subway. The sandwich business, while apparently similar to pizza as a fast-food business, is still a different business than is the pizza business. Other very good fast-food firms have entered different fast-food businesses without success. One notable example is McDonalds. Several years ago, it tried to sell pizza in its stores and failed miserably.
You may see other companies expanding into new businesses that are apparently related to their own business. When you see that, beware. (See the Perspective, “Finding the Open Door” on StrategyStreet.com.) Some years ago a manufacturer watched as its competitors began buying into the distribution channel for its product. In a panic, the company decided that it had to do the same thing or lose its customer base. So it, and most of its competitors, entered the distribution business. The manufacturer had assumed that it would have an advantage in the distribution business because it made the product that would be sold there. Naturally, the distributors who were not purchased by the manufacturers became very upset. In addition, the manufacturers knew little about how to make a success of the distribution business. The result was a very expensive failure for all of the manufacturers who entered the distribution business. The distribution business had different customers with completely different needs than the customers of the manufacturing business. The manufacturers had no real advantages in this business.
Before a company expands into a related business, it needs to be clear on exactly where it has advantages over people already in the business. Otherwise, disaster awaits.
Thursday, March 12, 2009
The Flexibility of a Great Retailer
Many people in the United States have heard little of Tesco, but it is a great retailer. In fact, it is the fourth largest retailer in the world, following Wal-Mart, Carrefour and Home Depot.
Tesco has about 30% of the total grocery sales in the U.K. There it operates with several different formats and price points. It has been very successful, both in the U.K. and in the several other countries in which it has operated.
In late 2007, the company opened its first U.S. stores, called Fresh & Easy. There are now 114 of these stores spread out through California, Arizona and Nevada. The Fresh & Easy format calls for small stores of about 10,000 square feet, focused on food, with an “Every Day Low Price” pricing scheme where prices were 10 to 25% below those at regular grocery stores.
The economy immediately presented Tesco with big problems. The Western U.S. has been hard hit by the recession. Customers have grown accustom to “Every Day Low Prices.” As a result, while Fresh & Easy generates more sales per square foot than the industry average, the company has not been able to open as many stores as it had hoped.
The company has responded quickly and creatively. Since customers began to take “Every Day Low Prices” for granted, the company began emphasizing extra low prices on individual items. They promoted low-priced special items, using radio commercials. As an example, the company offered $9.99 Valentines Day bouquets through radio commercials. The company also began emphasizing its Buxted brands in its stores. In the meat isle, these private label products are trimmed less well than the standard Fresh & Easy products and cost as much as 40% less.
These pricing moves are impressive. Most low-end competitors, such as Fresh & Easy in the U.S. market, could not afford to emphasize even lower priced products and expensive mass media advertising. (See the Perspective, “Turmoil Below: Confronting Low-End Competition” on StrategyStreet.com.) Few, if any, low-end retailers would do this, but Tesco did.
The company also has made changes in the look of its stores. The company repainted the walls in pastels and added a warmer color to the concrete floors after customers reported that they thought the stores were too sterile. Remember, most of these stores are less than a year old. The maintenance schedule did not call for a new paint job. But the customer did.
I am not sure whether the current Tesco concept will succeed. It is likely, however, that Tesco will find a format that works well in the United States. Their moves to date demonstrate that they are a flexible and creative company, determined to succeed.
Tesco has about 30% of the total grocery sales in the U.K. There it operates with several different formats and price points. It has been very successful, both in the U.K. and in the several other countries in which it has operated.
In late 2007, the company opened its first U.S. stores, called Fresh & Easy. There are now 114 of these stores spread out through California, Arizona and Nevada. The Fresh & Easy format calls for small stores of about 10,000 square feet, focused on food, with an “Every Day Low Price” pricing scheme where prices were 10 to 25% below those at regular grocery stores.
The economy immediately presented Tesco with big problems. The Western U.S. has been hard hit by the recession. Customers have grown accustom to “Every Day Low Prices.” As a result, while Fresh & Easy generates more sales per square foot than the industry average, the company has not been able to open as many stores as it had hoped.
The company has responded quickly and creatively. Since customers began to take “Every Day Low Prices” for granted, the company began emphasizing extra low prices on individual items. They promoted low-priced special items, using radio commercials. As an example, the company offered $9.99 Valentines Day bouquets through radio commercials. The company also began emphasizing its Buxted brands in its stores. In the meat isle, these private label products are trimmed less well than the standard Fresh & Easy products and cost as much as 40% less.
These pricing moves are impressive. Most low-end competitors, such as Fresh & Easy in the U.S. market, could not afford to emphasize even lower priced products and expensive mass media advertising. (See the Perspective, “Turmoil Below: Confronting Low-End Competition” on StrategyStreet.com.) Few, if any, low-end retailers would do this, but Tesco did.
The company also has made changes in the look of its stores. The company repainted the walls in pastels and added a warmer color to the concrete floors after customers reported that they thought the stores were too sterile. Remember, most of these stores are less than a year old. The maintenance schedule did not call for a new paint job. But the customer did.
I am not sure whether the current Tesco concept will succeed. It is likely, however, that Tesco will find a format that works well in the United States. Their moves to date demonstrate that they are a flexible and creative company, determined to succeed.
Monday, March 9, 2009
GM's China Problem
GM has been a strong performer in the Chinese auto market. But their sales have hit a wall. In 2008, the Chinese automobile market was up 7%, but GM’s automobile sales were down 16%.
GM is losing market share to the usual Japanese suspects, Toyota and Honda, who are aggressively expanding in China. But the company is also losing market share to the more expensive Audi and BMW models.
What is behind this loss of market share? Two reasons seem apparent. First, GM’s problem with potential bankruptcy in the United States has scared away some of the Chinese consumers. But the problem is deeper than that. There is a significant problem in the cars that GM is offering the Chinese consumer.
GM is competing in China with the Buick brand name. Its best seller is a mid-sized sedan called the Excelle. The Buick Excelle is made in Korea. It is also sold in other emerging markets as the Chevrolet Lacetti. Chinese consumers have gradually become aware of the Excelle’s Korean engineering and they don’t think it is as good as American-designed automobiles. In addition, the Japanese in China, as they have in the United States, have set the quality standard with their automobiles. Some Chinese believe GM is not up to that standard.
GM is beginning to slip with the Chinese consumer because of Reliability failures. (See the Perspective, “Failure Shifts More Share Than Success” on StrategyStreet.com.)
GM is losing market share to the usual Japanese suspects, Toyota and Honda, who are aggressively expanding in China. But the company is also losing market share to the more expensive Audi and BMW models.
What is behind this loss of market share? Two reasons seem apparent. First, GM’s problem with potential bankruptcy in the United States has scared away some of the Chinese consumers. But the problem is deeper than that. There is a significant problem in the cars that GM is offering the Chinese consumer.
GM is competing in China with the Buick brand name. Its best seller is a mid-sized sedan called the Excelle. The Buick Excelle is made in Korea. It is also sold in other emerging markets as the Chevrolet Lacetti. Chinese consumers have gradually become aware of the Excelle’s Korean engineering and they don’t think it is as good as American-designed automobiles. In addition, the Japanese in China, as they have in the United States, have set the quality standard with their automobiles. Some Chinese believe GM is not up to that standard.
GM is beginning to slip with the Chinese consumer because of Reliability failures. (See the Perspective, “Failure Shifts More Share Than Success” on StrategyStreet.com.)
Thursday, March 5, 2009
Creative Price Reductions to Gain Share
Not too many of us today would like to be in the retail clothing business. Fine retailers world-wide are suffering a dismal decrease in demand. Jos. A. Bank Clothiers has bucked the trend.
Jos. A. Bank used creative discount pricing to grow its same store sales while around them competitors faced margin carnage. For one day in September, and again for a few days after Christmas, the company offered a “buy one suit, get two free” sale. This was just one of its gimmicks. There have been several others. The company’s sales have grown by double digits in the past three quarters, and same store sales have grown at 7%. (See the Perspective, “Achieving the Low Cost Position” on StrategyStreet.com.)
The company is frank about its approach to pricing in this environment. They are looking to gain market share. These pricing gimmicks would not work unless competitors cooperated. The competitors for Jos. A. Bank must allow them to gain share with discounts by refusing to match their pricing promotions. It looks like Jos. A. Bank succeeded here, at the expense of their competitors.
Jos. A. Bank used creative discount pricing to grow its same store sales while around them competitors faced margin carnage. For one day in September, and again for a few days after Christmas, the company offered a “buy one suit, get two free” sale. This was just one of its gimmicks. There have been several others. The company’s sales have grown by double digits in the past three quarters, and same store sales have grown at 7%. (See the Perspective, “Achieving the Low Cost Position” on StrategyStreet.com.)
The company is frank about its approach to pricing in this environment. They are looking to gain market share. These pricing gimmicks would not work unless competitors cooperated. The competitors for Jos. A. Bank must allow them to gain share with discounts by refusing to match their pricing promotions. It looks like Jos. A. Bank succeeded here, at the expense of their competitors.
Monday, March 2, 2009
Slowing a Price Decline with a Low-Priced Product
For the last several years, most landline telephone companies have offered special discount deals to customers who threaten to cut their landline service. But the trickle of customers leaving landline service, and depending solely on cell phones, has turned into a stream.
Verizon believes it has at least a partial answer to slow the customer defection from the landline business. The company is considering introducing a $5 monthly voice plan that would allow customers to receive unlimited calls, but dial out only to 911 and Verizon Customer Service. This is a new low price point in the market. This price point compares with the Verizon unlimited nation-wide home phone plans which start at $40 a month.
Verizon is pricing defensively, trying to keep customers from leaving the company for cheaper pastures. In order to develop this defensive pricing plan, Verizon made three choices: the approach to take, the segments to serve, and the components of price to use to serve those segments. For many more examples of these three choices and how they defend both market share and margins, see our new Perspective, “Meeting Falling Prices with Creativity” in the Perspectives section of StrategyStreet.com.
Verizon believes it has at least a partial answer to slow the customer defection from the landline business. The company is considering introducing a $5 monthly voice plan that would allow customers to receive unlimited calls, but dial out only to 911 and Verizon Customer Service. This is a new low price point in the market. This price point compares with the Verizon unlimited nation-wide home phone plans which start at $40 a month.
Verizon is pricing defensively, trying to keep customers from leaving the company for cheaper pastures. In order to develop this defensive pricing plan, Verizon made three choices: the approach to take, the segments to serve, and the components of price to use to serve those segments. For many more examples of these three choices and how they defend both market share and margins, see our new Perspective, “Meeting Falling Prices with Creativity” in the Perspectives section of StrategyStreet.com.
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