Unbundling – Charging for What Used to be Included in the Whole

For 10 months I was knee deep in studying unbundled pricing and trying to find answers to the questions:

  1. Why do customers hate it and feel nickel and dimed?
  2. How can businesses successfully practice unbundled pricing?

The work culminated in two major experimental works on understanding consumer behavior. The first work was the finding that  answer to both questions lie in “reference price” and the second work found customer segmentations and how these segments value the “freebies” (or suffer from paying for them).

For definition of terms see here.

Recently I saw a press release from Continental airlines on their plan to discontinue free inflight meals. Surprisingly, they were the only airline to serve free in-flight meals (based on time and on select flights) until now. Their current plan follows the rules I set forth in my results.

The menu will include freshly prepared hot and cold mealtime selections similar to those served in casual-dining restaurants, such as Asian-style noodle salad, grilled chicken spinach salad, Angus cheeseburger, and Jimmy Dean sausage, egg and cheese sandwich. Snack and dessert options — including a gourmet cheese & fresh fruit plate, several types of snack boxes, a la carte brand-name snacks and chocolate-covered Eli’s Cheesecake on a stick — will also be available for purchase. Prices will range from $1.50 for Pringles Original Potato Crisps to $8.25 for the grilled chicken spinach salad.

Instead of simply charging for the same old airline meals, they are introducing both premium and basic meals over a wide range of prices.  Higher priced options increase customer reference price and presence of a range of options make it a choice among them rather than a referendum on just one.

While your cost concerns and profit motives may drive you to flip the switch and charge for the freebies, free to fee move should not be attempted without understanding and improving customer reference price and most importantly what is relevant to the different segments.

Kudos to Continental for effective execution of Unbundled pricing.

Unbundling is not about nickel and diming and it does not have to be a brand killer. When done right it can be a source of incremental profit.

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