Recognizing upside of price unbundling – Southwest says bags may not fly free

baggage_fee_profitFor a while Southwest has stood steadfastly against charging for checked-in bags. They ran several advertising campaigns delineating this clear absence  of extra fees. They told us bags fly free. They told us how the bag fees add up to additional $100 per leg. All the while other Airlines were happily charging us for our bags.

Revenue from bag fees alone reached $769 millions in 2010 (the peak of SouthWest campaign against bag fees).  While most airlines face some level of customer backlash they successfully overcame complaints with better management of reference price. Emboldened by their success Airlines (all but Southwest)  “drained the pond” to expose all the hidden obstacles to value capture.  After scrutinizing every freebie thrown in with the ticket they moved from charging for extras to delivering products that deliver value and pricing for that value delivered.

The result? $6.1 billion in new revenues and with huge upside potential from other service enhancements. After all cost reductions have a lower limit, you can only cut so much but revenue upside from value creation has theoretically unlimited upside.

bags-fly-freeSouthwest stood by for the past seven years letting the revenue innovation pass by and not partaking in the fees growth. As I wrote before, it did not matter they were the only one not charging fees. Customers are trained to pay the fees everywhere and they are more than accepting of such fees. In 2008 I wrote differentiating on no-fees was not a good strategy for Southwest.  It could be argued fees are a fairness issue, shouldn’t passengers who do not checkin bags get a discount on their ticket price?

This week, five years later, we read they heard my message loud and clear.

Southwest CEO, Mr. Gary Kelly, said recently

 in one of his strongest hints to date that the policy could change, Mr. Kelly said that if fliers come to better understand and maybe even prefer “an a la carte approach…we’d be crazy not to provide our customers with what they want.”

Kudos to him for not holding on to a sub-optimal strategy just because they spent all these years supporting it. Not many have the courage to refine or toss out failed strategies, both due to sunk cost fallacy and fear of being seen inconsistent.

If the customers come to better understand value and are willing to pay price for it,  you too would be crazy not to provide that value at a price that lets you capture your fair share of value created.

What is your pricing strategy?

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