Southwest Unbundling Pricing

Southwest ran  marketing campaigns about its “No Hidden Fees” model. They did not charge for baggage, drinks, pillows or like Ryan Air for the toilet. Despite the rest of the airlines charging for baggage etc., Southwest did not gain market share. When every airline was practicing unbundled pricing, everyone assumed Southwest was doing so as well. Their messaging about no fees did not create differentiation they sought. I wrote then how this was not a good move for Southwest and how they were leaving money on the table.

Now Southwest, after seeing their first ever loss, is slowly tipping its toes into unbundled pricing.

The Dallas-based airline, which flies more passengers within the U.S. than any other carrier, said customers can move up the queue at its gates for a $10 fee starting Thursday. Unlike most other airlines, Southwest doesn’t have assigned seating.

I completely support this move. Unbundling is about exposing revenue opportunities, identifying components that are of value to customers and charging for it. In the case of baggage fees, not all customers, especially the business travellers, were not using the service. For those who used the service, it was of considerable value so the airline started charging for it.

Southwest’s Vice President of Marketing, Mr.Kevin Krone said,

“What other folks are doing is charging money for what they used to do for free. What we’re doing is offering new things that we hadn’t done before,”

This is true. Even though the services added value to customers, they were not willing to pay for these because their reference price was $0. Southwest will have an easier task of selling new services because they do not have to surmount the reference price hurdle as long as they are  charging for new services. According to an analyst, baggage fees will bring in $500 a year for Southwest. If they want to go that route  they have to focus on increasing customer reference price (think options).  And about all  those Ads about “Fees Don’t Fly With Us”?  Customers are not going to remember and again reference price improvement will help address that.