Defusing Customer Backlash From Price Increases

My previous consumer behavior experiment led me to conclude that customer backlash to pricing changes stem from the reference price, the price they used to pay or a service despite the value they get. Recently I saw a blog post about Frontier Airlines by Mr. Andrew Hyde regarding its changes to standby policy. Frontier now charges a fee for going standby on an earlier flight. Before they did that they did not allow standby on earlier flights, this had caused Mr. Hyde to revolt and even say that he would never travel by that airline.

Mr.Hyde, as he points out in the comment, did not object to price increase per se and contrary to what I wrote earlier his objection was to change in policy without notice.  The net is customers will be less than willing to pay for services that used to be free because their reference price is $0.

This situation is no different from the customer backlash faced by US Airways before it decided to drop its $1.99 drink fee. It makes perfect business sense for Frontier to charge for this service regardless of the  costs associated with admitting a standby passenger on a partially empty flight. Frontier should have recognized the reference price effect if they were were planning to charge for the standby before they denied it to some. They should have  first worked to improve this from $0 to a positive value before introducing the price changes.

For instance, it could have sent all its travellers (anyone whose email address it has, past, present and future) a coupon or two for “Free standby”. Stated clearly in that coupon is the price of the standby and the value those customers get by using the coupon for a standby. This would have cost them nothing more than the cost of sending out the coupon but the effect is to improve the reference price of the standby service from $0 to the dollar amount marked in the coupon.

A business simply cannot ignore the effects of reference price and should actively work to manage it.

4 thoughts on “Defusing Customer Backlash From Price Increases

  1. Just a clarification: Frontier changed the policy to not allow it, not to raise the price. They have since introduced a pricing scheme, but at the time, and reason why I wrote the post, is that they silently changed their policy to not allow standby, at all.

    If it was about a small fee, or if they had not just flat out lied to me saying the flight was completely full, there would not have been an issue.

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  2. I should not say “no costs”, I should have said “regardless of costs”. Any marketer should be able charge a price for the value they add. Sometimes customers are reluctant to pay even though this service adds them considerable value, that is because of reference price. The reference price effect is especially high when the previously charged price is $0 (this is discussed in paper by Dan Ariely
    The reference price may make the customers think they are not getting any value. So working to improve this will help to send the value signal and hence be able to capture some of the value with a pricing.

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